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As IPO Approaches, Facebook Addresses Weaknesses

Posted on Monday, Apr 9th 2012

Social networking giant Facebook finally filed their much-anticipated S-1 in February 2012. Analysts believe that the stock will probably list next month. Facebook’s IPO will list on the Nasdaq under the ticker FB and is expected to raise $5 billion, pegging the company’s valuation at more than $100 billion. That would make their IPO the biggest in the history of Silicon Valley.

Facebook’s Financials
Their S-1 filing also helped put to rest the mystery behind their financials. Last year, Facebook’s revenues grew 88% over the year to $3.7 billion. In 2009, they earned revenues of $777 million. Unlike other new age Internet-based companies, Facebook has been raking in profits. They reported earnings of $1 billion on their revenues last year. EPS has grown from $0.10 in 2009 to $0.28 in 2010 and $0.46 in 2011.

Facebook generates revenues through advertising, payments, and other fees collected from the sale of virtual goods. Advertising revenues grew from $764 million in 2009 to $3.154 billion in 2011. Revenues from payments and other fees has seen significant growth, from $106 million in 2010 to $557 million in 2011.

Facebook saw the number of users grow from 800 million in September 2011 to 845 million as of December 2011. Active users grew from 327 million last year and 457 million in the quarter ended September 2011 to 483 million in December 2011. They reported more than 100 billion friendships on their sites and users posting more than 250 million photos daily and 2.7 billion “likes” and comments. They are also seeing significant growth in the mobile user base. As of December 2011, the number of mobile device active users was more than 425 million.

Facebook’s Worries
Not surprisingly, it is not just the social gaming company Zynga that is worried about their dependence on Facebook; Facebook is concerned as well. According to their S-1 filing, Facebook earned 12% of their revenues last year from Zynga.

Analysts believe that worldwide revenues from transactions of virtual goods have grown from $2 billion in 2007 to $7 billion in 2010. That number is projected to grow to $15 billion by 2014. Players like Zynga help generate this virtual goods revenues for Facebook. Apart from revenues deriving from fee charges to processes sales of virtual goods, Zynga also helps Facebook generate a significant number of pages for advertisement display. Facebook believes that if Zynga migrates to other platforms, their revenues may be hurt.

Another worry for Facebook is that of patent-related lawsuits. Last month, Yahoo filed a lawsuit against Facebook claiming that Facebook infringed 10 patents on webpage advertising and user interaction on a network. Facebook’s current patent portfolio is rather weak as they own fewer than 60 U.S. patents. However, the company is boosting that and recently purchased 750 patents from IBM for various software and networking technologies.

Facebook’s Acquisitions
Facebook meanwhile continued to make talent-related acquisitions during the quarter. Last month they acquired GazeHawk, a Mountain View–based provider of eye-tracking services. GazeHawk’s six-member team is known for having developed a best-of-class technology that uses ordinary webcams to determine where the viewers were looking on their computer screens. Other talent-related acquisitions made last quarter included the team for Caffeinated Mind, a San Francisco–based startup that focuses on rapid in-browser file transfer and big data transfer. Caffeinated Mind’s products include Sendoid, an in-browser file transfer service and Expresso, a big data transfer service.

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$100 billion seems too much to me since it is likely that it would face some competititon from GOOGLE+

Rakesh Tuesday, April 10, 2012 at 12:16 AM PT

Did you write this article just before the Instagram acquisition?!?

What are your thoughts and opinions about the Billion $ acquisition by Facebook? It doesnt look like FB valued Instagram using any Valuation model based on Revenues/Sales.

Do you think this is just another Silicon Valley splurge of money or a very smart move by FB given the threats faced by them as you have outlined above?

Ashok Tuesday, April 10, 2012 at 11:13 PM PT

Yes, the article came out right before the acquisition was announced.
It was a preemptive acquisition, obviously, to keep Instagram out of the hands of Google, Apple, etc.
But the price is extremely high.

And yes, I think Facebook is looking for ways to mitigate its revenue concentration on Zynga, and they
will likely look for ways to monetize Instagram as a step towards that. Given that it is a free app, I am not sure
if this was the smartest acquisition for that purpose. I’d like to see them buy some good paid apps that they
can then market more heavily, and create momentum behind.

As you know, I don’t like ‘valuation without revenue’ businesses very much 🙂

Sramana Mitra Wednesday, April 11, 2012 at 11:39 AM PT

Yes, the price seems to be something out of the box. But I think its good that Facebook is change the revenue concentration on Zynga. Isn't it good? What do you think? And I also heard it to be a free app, but not sure.

Dawson Thursday, June 28, 2012 at 5:18 AM PT

In my opinion, the most likely reason for the acquisition is expressed in this video http://www.youtube.com/watch?v=dbod2QALiu8. But I may be wrong.

Prashant Sunday, April 15, 2012 at 12:29 PM PT

I doubt that this argument that Instagram investors wanted to roll themselves into Facebook is reasonable. I don’t think Zuckerberg can be influenced to do such things. I don’t investors have that kind of influence on the guy.

Sramana Mitra Sunday, April 15, 2012 at 5:55 PM PT

I stand corrected then. 🙂

Prashant Monday, April 16, 2012 at 5:46 AM PT

Couldn't agree more !!

Rodrigue Saturday, May 12, 2012 at 9:32 PM PT