Facebook Financial Statement Analysis

Explanation about Financial statement and fluctuation’s result and sources

We will separately upload our financial statement in spreadsheet format, and we will discuss the material fluctuations separately in Revenue, PPE, and liability section.

Analysis of cash flows

Significant Cash flows

Under the section Liquidity and Capital Resources (Facebook k10 2018, p51), “Facebook’s cash and cash equivalents usage. First, Cash and cash equivalents, and marketable securities consist mostly of cash on deposit with banks, investments in money market funds, and investments in U.S. government securities, U.S. government agency securities, and corporate debt securities. Cash and cash equivalents, and marketable securities were $41.11 billion as of December 31, 2018.”

The share repurchase is one of a significant cash usage for Facebook, in 2017, their board of directors authorized a share repurchase program that does not have an expiration date. From that, they have been spending 12.93 billion of common stock, and still have $9.0 billion remained and authorized for repurchases. In 2018, Facebook also spent $13.92 billion towards PPE.

Another significant cash usage is for the investing activities, and the most significant part of this segment is servers, data centers, office buildings, and network infrastructure. During 2018 their $13.92 billion of capital expenditures is on data centers, servers, network infrastructure, and office buildings. During 2017, the main investment is marketable securities and servers, data centers, office buildings, and network infrastructure, as well as 16. And this trend will continue to grow in 2019.

In Facebook 10k, we can see that their main source of cash from operating activities is net income for the past 3 years. In 2018, Cash provided by operating activities is net income, adjusted for certain non-cash items, such as total depreciation and amortization of 4.32 billion and share-based compensation is a $4.15 billion expense.

Financing Need

About the financing need, from their 10k report, they have sufficient amount to meet their cash needs for the foreseeable future.

Revenue

Revenue fluctuation analysis:

Selling advertisements to target users is the main source of Facebook’s revenue. Therefore, the total number of active users and the effectiveness of distributing information are the key factors that affect its revenue. Facebook claims that active user growth rate will decline over time. Existing user base may shrink (example of Q4 2017 in NA market) by different reasons including user behavior changes, competitive products switching, new product introduction failures. Related regulations in Europe (General Data Protection Regulation) and similar regulations in other areas may affect customer loyalty. Fewer cooperation with advertising marketers will dramatically affect Facebook’s revenue if a considerable loss of users or increasing inactive users occurs. Facebook needs to compete with other companies such as Google and Tencent who also sell advertisement through their platforms.

The brand also contributes significantly since it is natural for users to choose products that worth trusting. The data misuse during the 2016 election which was widely discussed, and Internet attack occurred in 2018 may play an essential role in the decrease of the stock price as well as brand value. In addition to the brand of the company, personal brand of its CEO, Mark Zuckerberg, may also contribute to the acceptance of Facebook’s products. As disclosed in the annual report, Mr. Zuckerberg is able to make major decisions related to the company. This may lead to potential revenue fluctuation depending on whether his decisions favor users ( Facebook’s annual report 2018, P9 - P27).

After calculating the annual growth rate of Facebook’s revenue, we found a decreasing trend in recent years, especially after the year 2016. We believe that the continuing exposure and public discussion about the potential user data misuse by its partner and the following decreasing brand value may be a key factor in this negative trend. According to the annual report, active users kept increasing, although in a slower growth rate as they expected, in the last three years (Facebook’s annual report 2018, P37). However, their revenue records indicate several fluctuation periods in the same time period (Facebook’s annual report 2018, P38). Therefore, we believe that it is the effectiveness of advisement distributing or the amount of cooperation with marketers has been decreased. The fluctuation in Asia-Pacific market is much smaller than that in NA or Europe market, which supports our opinions since the data misuse and more strict regulations issued previously mentioned are more related to NA and Europe users.

Revenue recognition practice, including the company’s plans for implementing the new standard:

Facebook’s revenue comes mainly from the advertising section. The following is the revenue data of Facebook from 2014-2018

(source: Facebook’s annual report 2018, p64); (Facebook’s annual report 2016, p62)

From the table, we can get the conclusion that the main source of revenue is advertising, so the following section would mainly discuss the rules for advertising revenue recognition.

Advertising revenue recognition (before January 2018)

From the official Facebook website, the pattern of Facebook advertising business is divided into two parts, one is Impression-based, the other is Action-based. For the business of impression-based ads, Facebook recognize revenue when the impression delivery was happened, which means the ads have been displayed on the Facebook’s website or App. For action-based advertising, revenue recognition occurs when the ads are delivered in the period that a user takes action. There are several situations below that will be considered as taking action: first, Action occurs on the ads, if users saw the ads on the site of Facebook and do the following things, such as click link, watch relative video or share, that would be recorded as taking action. Second, Actions taken off the ads Facebook records the actions that happened within 1 day of someone seeing the ads or within 28 days of someone clicking on the ads.

Cause Facebook seen themselves as a non-primary obligor, they recognize revenue on the net basis.

Advertising revenue recognition (after January 2018)

Facebook