Facebook 2013 Annual Report Download

Download and view the complete annual report

Please find the complete 2013 Facebook annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 96

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96

Table of contents

  • Page 1

  • Page 2

  • Page 3
    ... 28, 2013, the last business day of the registrant's most recently completed second fiscal quarter, was $49,067,097,971 based upon the closing price reported for such date on the NASDAQ Global Select Market. On January 28, 2014, the registrant had 1,975,722,473 shares of Class A common stock and 574...

  • Page 4
    ... Item 7. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations 32 34 36 56 57 85 85 85 Business Risk Factors Unresolved Staff Comments...

  • Page 5
    ..., business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part I, Item 1A, "Risk Factors" in this Annual Report on Form 10...

  • Page 6
    ... our user base for the applicable period of measurement, there are inherent challenges in measuring usage of our products across large online and mobile populations around the world. For example, there may be individuals who maintain one or more Facebook accounts in violation of our terms of service...

  • Page 7
    ... our website, mobile sites, smartphone applications, and feature phone products. Through mobile and web applications built by developers that integrate with Facebook, people can interact with their Facebook friends while playing games, listening to music, watching movies, reading news, and engaging...

  • Page 8
    ... store to download. If a mobile developer would like to target users who already have their application installed, they can link users from the News Feed ad to a customized, specific location inside the application, such as a sale, promotion or specific content such as a new album or hotel listing...

  • Page 9
    ...someday connect all of these people. As of December 31, 2013, we had 1.23 billion MAUs globally. We intend to increase the size of our network by continuing our marketing and user acquisition efforts, enhancing our products including mobile applications, and making Facebook more easily accessible to...

  • Page 10
    ...MAUs who used Facebook mobile products as of December 31, 2013. We believe that mobile usage of Facebook is critical to user growth and engagement over the long term. Enable Developers to Build, Grow, and Monetize Their Mobile and Web Applications. The success of Facebook's developer ecosystem is an...

  • Page 11
    ... engage, and retain users, to attract and retain marketers, to attract and retain developers to build compelling mobile and web applications that integrate with Facebook, and to attract and retain highly talented individuals, especially software engineers, designers, and product managers. We compete...

  • Page 12
    ... that have a specialized focus on Facebook advertising. We currently operate more than 30 sales offices around the globe. We have operations teams to provide support for our users, developers, and marketers in five regional centers located in Menlo Park, California; Austin, Texas; Dublin, Ireland...

  • Page 13
    ... offices are located at 1601 Willow Road, Menlo Park, California 94025, and our telephone number is (650) 543-4800. Facebook, the Facebook logo, FB, the Like button, Instagram and our other registered or common law trademarks, service marks, or trade names appearing in this Annual Report on Form...

  • Page 14
    The contents of the websites referred to above are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive textual references only. 12

  • Page 15
    ... that event, the trading price of our Class A common stock could decline, and you could lose part or all of your investment. Risks Related to Our Business and Industry If we fail to retain existing users or add new users, or if our users decrease their level of engagement with Facebook, our revenue...

  • Page 16
    ... advertising as a result of adverse media reports or other negative publicity involving us, content on Facebook, developers with Facebook-integrated mobile and web applications, or other companies in our industry; our inability to create new products that sustain or increase the value of our ads...

  • Page 17
    ... quarter of 2013, the mobile advertising market remains a new and evolving market. In addition, we do not currently offer our Payments infrastructure to applications on mobile devices. If users increasingly access Facebook mobile products as a substitute for access through personal computers, and...

  • Page 18
    ... competitors; customer service and support efforts; marketing and selling efforts, including our ability to provide marketers with a compelling return on their investments; our ability to establish and maintain developers' interest in building mobile and web applications that integrate with Facebook...

  • Page 19
    ... including ads on pages generated by developers' applications on the Facebook website, direct advertising on Facebook purchased by developers to drive traffic to their mobile and web applications, and fees from developers' use of our Payments infrastructure to sell virtual and digital goods to users...

  • Page 20
    ... store information provided by us or by our users through mobile or web applications integrated with Facebook. If these third parties or developers fail to adopt or adhere to adequate data security practices or fail to comply with our terms and policies, or in the event of a breach of their networks...

  • Page 21
    ... our mobile products; our ability to maintain or increase Payments and other fees revenue; the diversification and growth of revenue sources beyond advertising and Payments; the development and introduction of new products or services by us or our competitors; increases in marketing, sales, and...

  • Page 22
    ... and practices. For example, the interpretation of some laws and regulations that govern the use of names and likenesses in connection with advertising and marketing activities is unsettled and developments in this area could affect the manner in which we design our products, as well as our terms of...

  • Page 23
    ... open source software in our products. For example, we have contributed certain specifications and designs related to our data center equipment to the Open Compute Project Foundation, a non-profit entity that shares and develops such information with the technology community, under the Open Web...

  • Page 24
    ... the acquired business or assets, our business, revenue, and operating results could be adversely affected. Any integration process may require significant time and resources, and we may not be able to manage the process successfully. We may not successfully evaluate or utilize the acquired products...

  • Page 25
    ... after we have started to fully utilize the underlying equipment, that could further degrade the user experience or increase our costs. Our products and internal systems rely on software that is highly technical, and if it contains undetected errors, our business could be adversely affected. Our...

  • Page 26
    ... managing multiple relations with users, marketers, developers, and other third parties. In the event of continued growth of our operations or in the number of our third-party relationships, our information technology systems or our internal controls and procedures may not be adequate to support...

  • Page 27
    ...variety of additional risks as a result of Payments on Facebook, including increased costs and diversion of management time and effort and other resources to deal with bad transactions or customer disputes; potential fraudulent or otherwise illegal activity by users, developers, employees, or third...

  • Page 28
    ...increased business and economic risks that could affect our financial results. We plan to continue the international expansion of our business operations and the translation of our products. We currently make Facebook available in more than 70 different languages, and we have offices or data centers...

  • Page 29
    ...scale of our international business activities, any changes in the taxation of such activities may increase our worldwide effective tax rate and harm our financial position and results of operations. Risks Related to Ownership of Our Class A Common Stock The trading price of our Class A common stock...

  • Page 30
    ...or anticipated changes in the size of our user base, the level of user engagement, or the effectiveness of our ad products; changes in operating performance and stock market valuations of technology companies in our industry, including our developers and competitors; price and volume fluctuations in...

  • Page 31
    ... Act, the listing requirements of the NASDAQ Global Select Market, and other applicable securities rules and regulations. Compliance with these rules and regulations has increased and likely will continue to increase our legal and financial compliance costs, make some activities more difficult, time...

  • Page 32
    ... voting power of our common stock, our board of directors will be classified into three classes of directors with staggered three-year terms and directors will only be able to be removed from office for cause; when the outstanding shares of our Class B common stock represent less than a majority of...

  • Page 33
    Item 1B. Unresolved Staff Comments None. Item 2. Properties As of December 31, 2013, we leased office and data center facilities around the world totaling approximately 2 million square feet, including one million square feet for our corporate headquarters in Menlo Park, California. We have data ...

  • Page 34
    ... Class B common stock is not listed nor traded on any stock exchange. Holders of Record As of December 31, 2013, there were 4,819 stockholders of record of our Class A common stock, and the closing price of our Class A common stock was $54.65 per share as reported on the NASDAQ Global Select Market...

  • Page 35
    ... Facebook, Inc. under the Securities Act of 1933, as amended, or the Exchange Act. The following graph shows a comparison from May 18, 2012 (the date our Class A common stock commenced trading on the NASDAQ Global Select Market) through December 31, 2013 of the cumulative total return for our Class...

  • Page 36
    ... financial statements for a description of our computation of basic and diluted earnings per share attributable to Class A and Class B common stockholders. As of December 31, 2013 2012 2011 (in millions) 2010 2009 Consolidated Balance Sheets Data: Cash, cash equivalents, and marketable securities...

  • Page 37
    ... believe that this methodology can provide useful supplemental information to help investors better understand underlying trends in our business. We use FCF in discussions with our senior management and board of directors. FCF has limitations as an analytical tool, and you should not consider it in...

  • Page 38
    ...age, location, gender, or interests. We offer marketers benefits such as targeted reach, engagement, Facebook ads, Facebook ad system and ad measurement. Developers. We enable developers to use Facebook's developer services to build, grow and monetize their mobile and web applications that integrate...

  • Page 39
    ... of our users affect our revenue and financial results by influencing the number of ads we are able to show, the volume of Payments transactions, as well as our expenses and capital expenditures. • Daily Active Users (DAUs). We define a daily active user as a registered Facebook user who logged in...

  • Page 40
    ... largely by increased mobile usage of Facebook. The number of DAUs using personal computers decreased modestly in December 2013 compared to the same period in 2012. • Mobile DAUs. We define a mobile DAU as a user who accessed Facebook via a mobile application or via versions of our website such as...

  • Page 41
    ... to share content or activity with his or her Facebook friends or connections via a third-party website or application 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. As of December 31, 2013, we...

  • Page 42
    ... applications or our mobile website during the month ended December 31, 2013, increasing 89% from 157 million during the same period in 2012. The remaining 649 million mobile MAUs accessed Facebook from both personal computers and mobile devices during December 2013. We anticipate that the rate...

  • Page 43
    ... of the geographic location of our users when they perform a revenue-generating activity. This allocation differs from our revenue by geography disclosure in our consolidated financial statements where revenue is geographically apportioned based on the location of the marketer or developer. 41

  • Page 44
    ..." of this Annual Report on Form 10-K. Revenue Recognition for Payments and Other Fees We enable Payments from our users to developers with applications on the Facebook website. Our users can make payments on Facebook by using debit and credit cards, PayPal, mobile phone payments, gift cards or other...

  • Page 45
    ...requisite service period for the entire award. We account for share-based employee compensation plans under the fair value recognition and measurement provisions in accordance with applicable accounting standards, which require all share-based payments to employees, including grants of stock options...

  • Page 46
    ... by displaying ad products on the Facebook website or mobile application and third-party affiliated websites or mobile applications. Marketers pay for ad products either directly or through their relationships with advertising agencies, based on the number of clicks made by our users, the number of...

  • Page 47
    ... of income data (as a percentage of revenue): Year Ended December 31, 2013 2012 2011 Consolidated Statements of Income Data: Revenue Costs and expenses: Cost of revenue Research and development Marketing and sales General and administrative Total costs and expenses Income from operations Interest...

  • Page 48
    ... 2013 as compared to 2012. The most important factor driving advertising revenue growth was an increase in revenue from ads in News Feed on both mobile devices and personal computers. News Feed ads are displayed more prominently, have significantly higher levels of engagement and a higher price...

  • Page 49
    ...marketers and developers based in the United States, compared to 51% in 2012. The change is due to a faster growth rate of international users and to the expansion of international sales offices and payment methods. The majority of our revenue outside of the United States came from customers located...

  • Page 50
    ...build new products for users, developers, and marketers. In 2014, we plan to continue hiring software engineers and other technical employees. We expect research and development expenses will rise in 2014 at a higher rate than it rose in 2013 due to the large share-based compensation expense in 2012...

  • Page 51
    ...and benefits expenses also increased due to a 19% increase in employee headcount to support global sales, business development and customer service. An increase in our user-, developer-, and marketer-facing marketing expense also contributed to the increase in 2012. In 2014, we plan to add sales and...

  • Page 52
    ... share-based compensation resulting from recognition of expense related to Pre-2011 RSUs as a result of our IPO in May 2012. Our effective tax rate in 2013 was also lower due to the reinstatement in 2013 of the federal tax credit for research and development activities. We recognized the benefit...

  • Page 53
    ... 2013 Sep 30, 2013 Jun 30, 2013 Mar 31, 2013 Dec 31, 2012 Sep 30, 2012 Jun 30, 2012 Mar 31, 2012 (in millions) Consolidated Statements of Operations Data: Revenue: Advertising Payments and other fees(1) Total revenue Costs and expenses: Cost of revenue Research and development Marketing and sales...

  • Page 54
    ... Mar 31, 2013 Dec 31, 2012 Sep 30, 2012 Jun 30, 2012 Mar 31, 2012 (as a percentage of total revenue) Consolidated Statements of Operations Data: Revenue: Advertising Payments and other fees Total revenue Costs and expenses: Cost of revenue Research and development Marketing and sales General and...

  • Page 55
    ...equity offering which was completed in December 2013, and $609 million in excess tax benefit from share-based award activity, offset by the repayment of our $1.5 billion term loan, $1.36 billion for purchases of property and equipment and $889 million for tax payments related to net share settlement...

  • Page 56
    ... for the net purchase of marketable securities, $1.24 billion for capital expenditures related to the purchase of servers, network infrastructure, and the construction of data centers, as well as $911 million for the acquisition of businesses and other assets, such as patents. The increase in cash...

  • Page 57
    ..., financial position, and cash flows. See Note 10 in the accompanying notes to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" and Part I, Item 3, "Legal Proceedings" of this Annual Report on Form 10-K for additional information...

  • Page 58
    ... securities and the market value of those securities. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately $73 million and $55 million in the market value of our available-for-sale debt securities as of December 31, 2013 and December 31, 2012...

  • Page 59
    ... Financial Statements and Supplementary Data FACEBOOK, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm Consolidated Financial Statements: Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements...

  • Page 60
    ..., in accordance with the standards of the Public Company Accounting Oversight Board (United States), Facebook, Inc.'s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring...

  • Page 61
    ... with the standards of the Public Company Accounting Oversight Board (United States), the 2013 consolidated financial statements of Facebook, Inc. and our report dated January 31, 2014 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP San Francisco, California January 31, 2014 59

  • Page 62
    FACEBOOK, INC. CONSOLIDATED BALANCE SHEETS (In millions, except for number of shares and par value) December 31, 2013 2012 Assets Current assets: Cash and cash equivalents $ Marketable securities Accounts receivable, net of allowances for doubtful accounts of $38 and $22 as of December 31, 2013 and...

  • Page 63
    FACEBOOK, INC. CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share amounts) Year Ended December 31, 2013 2012 2011 Revenue Costs and expenses: Cost of revenue Research and development Marketing and sales General and administrative Total costs and expenses Income from operations ...

  • Page 64
    FACEBOOK, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In millions) Year Ended December 31, 2013 2012 2011 Net income Other comprehensive income (loss): Change in foreign currency translation adjustment Change in unrealized gain/loss on available-for-sale investments, net of tax Change in ...

  • Page 65
    ... to employee share-based awards Tax benefit from share-based award activity Net income Balances at December 31, 2011 Issuance of common stock, net of issuance costs Issuance of common stock for cash upon exercise of stock options Issuance of common stock to nonemployees for past services...

  • Page 66
    ...long-term debt Proceeds from sale and lease-back transactions Principal payments on capital lease obligations Excess tax benefit from share-based award activity Net cash (used in) provided by financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in...

  • Page 67
    ... in accounts payable and accrued expenses and other current liabilities related to property and equipment additions Property and equipment acquired under capital leases Fair value of shares issued related to acquisitions of businesses and other assets $ $ $ 38 82 421 $ $ $ 38 184 131 $ $ $ 28...

  • Page 68
    ... July 2004. Our mission is to give people the power to share and make the world more open and connected. We build products that support our mission by providing value to Facebook users, marketers, and developers. We generate substantially all of our revenue from advertising and from fees associated...

  • Page 69
    ... equipment rent expense, energy and bandwidth costs, support and maintenance costs, and salaries, benefits and share-based compensation for certain personnel on our operations teams. Cost of revenue also includes credit card and other transaction fees related to processing customer transactions...

  • Page 70
    ... expense equal to the grant date fair value of the common stock on a straight-line basis over the employee's required service period. During the years ended December 31, 2013, 2012, and 2011, we realized tax benefits from share-based award activity of $602 million, $1.03 billion, and $433...

  • Page 71
    ... or the remaining lease term, in the case of a capital lease, whichever is shorter. The estimated useful lives of property and equipment are described below: Property and Equipment Useful Life Network equipment Buildings Computer software, office equipment and other Leased equipment and leasehold...

  • Page 72
    ..., rulings, advice of legal counsel, and updated information. Business Combinations We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase...

  • Page 73
    ... different industries and countries. We generated 46%, 51%, and 56% of our revenue for the years ended December 31, 2013, 2012, and 2011, respectively, from marketers and developers based in the United States, with the majority of revenue outside of the United States coming from customers located...

  • Page 74
    ...acquired during the year ended December 31, 2013 have estimated useful lives ranging from six to 15 years from the dates of acquisition. Note 3. Earnings per Share We compute earnings per share (EPS) of Class A and Class B common stock using the two-class method required for participating securities...

  • Page 75
    ... stockholders for diluted EPS Denominator Number of shares used for basic EPS computation Conversion of Class B to Class A common stock Weighted average effect of dilutive securities: Employee stock options RSUs Shares subject to repurchase Warrants Number of shares used for diluted EPS computation...

  • Page 76
    ...): Fair Value Measurement at Reporting Date Using Quoted Prices in Active Markets for Identical Assets (Level 1) Description December 31, 2013 Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash equivalents: Money market funds Marketable securities...

  • Page 77
    ... includes costs primarily related to the construction of data centers in Iowa and Sweden and network equipment infrastructure to support our data centers around the world. Construction in progress also includes the ongoing construction to expand our corporate headquarters in Menlo Park, California...

  • Page 78
    ...(in millions): 2014 2015 2016 2017 2018 Thereafter Total Note 8. Liabilities The components of accrued expenses and other current liabilities are as follows (in millions): December 31, 2013 2012 $ $ 160 150 138 116 82 237 883 Accrued property and equipment Accrued compensation and benefits Other...

  • Page 79
    ... offices, equipment, land and data centers with original lease periods expiring between 2014 and 2029. We are committed to pay a portion of the related actual operating expenses under certain of these lease agreements. Certain of these arrangements have free rent periods or escalating rent payment...

  • Page 80
    ... 31, 2013, primarily related to network infrastructure for our data center operations and, to a lesser extent, construction of our data center sites. The majority of these commitments are due within five years. Contingencies Legal Matters Beginning on May 22, 2012, multiple putative class actions...

  • Page 81
    ... employees, directors and consultants. Outstanding awards under the 2005 Stock Plan continue to be subject to the terms and conditions of the 2005 Stock Plan. We have initially reserved 25,000,000 shares of our Class A common stock for issuance under our 2012 Plan. The number of shares reserved...

  • Page 82
    ... the stock option and RSU award activities under the Stock Plans for the year ended December 31, 2013: Shares Subject to Options Outstanding Weighted Average Remaining Contractual Term (in years) Number of Shares (in thousands) Weighted Average Exercise Price Aggregate Intrinsic (1) Value (in...

  • Page 83
    ...to December 31, 2013, upon each settlement date, RSUs were withheld to cover the required withholding tax, which is based on the value of the RSU on the settlement date as determined by the closing price of our common stock on the trading day immediately preceding the applicable settlement date. The...

  • Page 84
    As of December 31, 2013, there was $2.69 billion of unrecognized share-based compensation expense, of which $2.4 billion is related to RSUs, and $286 million is related to restricted shares and stock options. This unrecognized compensation expense is expected to be recognized over a weighted-average...

  • Page 85
    ...to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result in the expiration of the net operating loss and tax credit carryforwards before their utilization. The events that may cause ownership changes include, but are...

  • Page 86
    .... Note 14. Geographical Information Revenue by geography is based on the billing address of the advertiser or developer. The following table sets forth revenue and property and equipment, net by geographic area (in millions): Year Ended December 31, 2013 2012 2011 Revenue: United States Rest of...

  • Page 87
    ..., the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Item...

  • Page 88
    ... 2014 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission (SEC) within 120 days of the fiscal year ended December 31, 2013. Our board of directors has adopted a Code of Conduct applicable to all officers, directors and employees, which is available on our website...

  • Page 89
    ... been omitted because they are not required, not applicable, not present in amounts sufficient to require submission of the schedule, or the required information is otherwise included. 3. Exhibits See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K. 87

  • Page 90
    ... this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Menlo Park, State of California, on this 31st day of January 2014. FACEBOOK, INC. Date: January 31, 2014 /S/ MARK ZUCKERBERG Mark Zuckerberg Chairman and Chief Executive Officer...

  • Page 91
    ... Chairman and Chief Executive Officer (Principal Executive Officer) Chief Financial Officer (Principal Financial Officer) Chief Accounting Officer (Principal Accounting Officer) Director Director Director Director Director Director Director January 31, 2014 /S/ DAVID A. EBERSMAN David A. Ebersman...

  • Page 92
    ...Certificate. Form of Class B Common Stock Certificate. Sixth Amended and Restated Investors' Rights Agreement, dated December 27, 2010, by and among Registrant and certain security holders of Registrant. Amendment No. 1 to Sixth Amended and Restated Investors' Rights Agreement, dated May 1, 2012, by...

  • Page 93
    ...Presentation Linkbase Document. 8-K 001-35551 10.1 August 15, 2013 X X 31.1 X 31.2 X 32.1# X 32.2# X 101.INS 101.SCH 101.CAL 101.DEF 101.LAB 101.PRE X X X X X X + Indicates a management contract or compensatory plan. †Portions of exhibit have been granted confidential treatment by...

  • Page 94

  • Page 95
    ... Capital and Clarium Capital Management and Partner of Founders Fund STOCKHOLDER INFORMATION Investor Relations Facebook, Inc. 1601 Willow Road Menlo Park, California 94025 [email protected] Investor Relations Website http://investor.fb.com Facebook's Class A common stock trades on NASDAQ under the...

  • Page 96