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£28 Million in Client Profits & Counting

How YOU pay to use Facebook

Facebook’s Business Model

Revenue $17.928 billion (2015) which is likely to hit at least $25 billion in 2016.

Facebook & Its Subsidiaries

  • Facebook. Facebook is a mobile application and website that enables people to connect, share, discover, and communicate with each other on mobile devices and personal computers. We had 1.04 billion daily active users (DAUs) on average in December 2015, an increase of 17% compared to December 2014. We had 934 million DAUs who accessed Facebook
    from a mobile device on average in December 2015, an increase of 25% compared to December 2014. There are a number of different ways to engage with people on Facebook, the most important of which is News Feed which displays an algorithmically-ranked series of stories and advertisements individualized for each person.
  • Instagram. Instagram is a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends.
  • Messenger. Messenger is a messaging application available for mobile and web on a variety of platforms and devices. Messenger enables people to reach others instantly and simply, and also enables businesses to engage with customers seamlessly and securely.
  • WhatsApp. WhatsApp Messenger is a fast, simple and reliable mobile messaging application that is used by people around the world and is available on a variety of mobile platforms.
  • Oculus. The Oculus virtual reality technology and content platform power products that allow people to enter a completely immersive and interactive environment to play games, consume content, and connect with others.

1.79 billion monthly active users as of September 30, 2016. Daily Active Users were 1.18 billion on average for September 2016, up 17% year-over-year. Mobile advertising revenue made up 84% of advertising revenue for Q3 2016, up from 78% of advertising revenue for Q3 2015. Q3 2016 revenue was $7.011 billion

Which means that Facebook, Inc. should take in around $15.67 per user who is active at least monthly per year. Thus, Facebook don’t need to charge you when you are able to make them $15.67 per annum in exchange for using their service with almost zero barriers to entry.

FACEBOOK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In millions, except for per share amounts)

(Unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,

2016

2015

2016

2015

Revenue

$    7,011

$    4,501

$    18,829

$    12,087

Costs and expenses:

   Cost of revenue

987

720

2,741

2,043

   Research and development

1,539

1,271

4,345

3,502

   Marketing and sales

925

706

2,651

1,953

   General and administrative

438

345

1,216

924

      Total costs and expenses

3,889

3,042

10,953

8,422

Income from operations

3,122

1,459

7,876

3,665

Interest and other income/(expense), net

47

(27)

125

(28)

Income before provision for income taxes

3,169

1,432

8,001

3,637

Provision for income taxes

790

536

2,057

1,510

Net income

$    2,379

$       896

$      5,944

$      2,127

Less: Net income attributable to participating securities

6

5

18

12

Net income attributable to Class A and Class B common stockholders

$    2,373

$       891

$      5,926

$      2,115

Earnings per share attributable to Class A and Class B common stockholders:

   Basic

$       0.83

$       0.32

$        2.07

$         0.76

   Diluted

$       0.82

$       0.31

$         2.05

$         0.75

Weighted average shares used to compute earnings per share attributable to Class A and Class B common stockholders:

   Basic

2,871

2,808

2,857

2,796

   Diluted

2,915

2,863

2,902

2,848

Share-based compensation expense included in costs and expenses:

   Cost of revenue

$         30

$         21

$           80

$           59

   Research and development

633

598

1,842

1,767

   Marketing and sales

94

82

269

236

   General and administrative

62

56

180

161

      Total share-based compensation expense

$       819

$       757

$      2,371

$      2,223

Payroll tax expenses related to share-based compensation included in costs and expenses:

   Cost of revenue

$           1

$         —

$             4

$             2

   Research and development

14

10

57

34

   Marketing and sales

2

2

9

8

   General and administrative

3

2

11

7

      Total payroll tax expenses related to share-based compensation

$         20

$         14

$           81

$           51

Amortization of intangible assets included in costs and expenses:

   Cost of revenue

$         55

$         44

$         153

$         133

   Research and development

9

10

28

29

   Marketing and sales

109

102

321

307

   General and administrative

22

24

66

70

      Total amortization of intangible assets

$       195

$       180

$         568

$         539

FACEBOOK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

September 30, 2016

December 31, 2015

Assets

Current assets:

Cash and cash equivalents

$                       6,038

$                      4,907

Marketable securities

20,102

13,527

Accounts receivable, net of allowances for doubtful accounts of $83 and $68 as of September 30, 2016 and December 31, 2015, respectively

3,070

2,559

Prepaid expenses and other current assets

1,118

659

   Total current assets

30,328

21,652

Property and equipment, net

7,899

5,687

Intangible assets, net

2,702

3,246

Goodwill

18,085

18,026

Other assets

660

796

Total assets

$                     59,674

$                    49,407

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$                          260

$                         196

Partners payable

239

217

Accrued expenses and other current liabilities

2,018

1,449

Deferred revenue and deposits

78

56

Current portion of capital lease obligations

7

   Total current liabilities

2,595

1,925

Capital lease obligations, less current portion

107

Other liabilities

2,964

3,157

   Total liabilities

5,559

5,189

Stockholders’ equity

Common stock and additional paid-in capital

38,756

34,886

Accumulated other comprehensive loss

(372)

(455)

Retained earnings

15,731

9,787

   Total stockholders’ equity

54,115

44,218

Total liabilities and stockholders’ equity

$                     59,674

$                    49,407

FACEBOOK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,

2016

2015

2016

2015

Cash flows from operating activities

Net income

$    2,379

$       896

$     5,944

$     2,127

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

591

486

1,728

1,402

Share-based compensation

819

757

2,371

2,214

Deferred income taxes

19

(383)

(123)

(672)

Tax benefit from share-based award activity

459

346

1,420

1,155

Excess tax benefit from share-based award activity

(459)

(346)

(1,420)

(1,155)

Other

4

6

23

13

Changes in assets and liabilities:

Accounts receivable

(253)

(207)

(478)

(405)

Prepaid expenses and other current assets

(51)

(55)

(311)

(145)

Other assets

42

29

46

4

Accounts payable

18

(9)

(21)

7

Partners payable

6

59

20

40

Accrued expenses and other current liabilities

219

50

641

291

Deferred revenue and deposits

(2)

(1)

21

(18)

Other liabilities

(214)

564

(103)

914

Net cash provided by operating activities

3,577

2,192

9,758

5,772

Cash flows from investing activities

Purchases of property and equipment

(1,095)

(780)

(3,222)

(1,831)

Purchases of marketable securities

(7,733)

(4,773)

(17,368)

(10,333)

Sales of marketable securities

5,633

1,399

9,791

4,125

Maturities of marketable securities

131

848

1,034

1,563

Acquisitions of businesses, net of cash acquired, and purchases of intangible assets

(61)

(27)

(81)

(309)

Change in restricted cash and deposits

8

33

82

77

Net cash used in investing activities

(3,117)

(3,300)

(9,764)

(6,708)

Cash flows from financing activities

Principal payments on capital lease and other financing obligations

(23)

(312)

(107)

Excess tax benefit from share-based award activity

459

346

1,420

1,155

Other financing activities, net

(8)

(8)

(2)

(20)

Net cash provided by financing activities

451

315

1,106

1,028

Effect of exchange rate changes on cash and cash equivalents

19

(22)

31

(99)

Net increase (decrease) in cash and cash equivalents

930

(815)

1,131

(7)

Cash and cash equivalents at beginning of period

5,108

5,123

4,907

4,315

Cash and cash equivalents at end of period

$    6,038

$    4,308

$     6,038

$     4,308

FACEBOOK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,

2016

2015

2016

2015

Supplemental cash flow data

Cash paid during the period for:

Interest

$         —

$           3

$          11

$            8

Income taxes, net

$       357

$         40

$        764

$        199

Non-cash investing and financing activities:

Net change in accounts payable, accrued expenses and other current liabilities, and other liabilities related to property and equipment additions

$       230

$       (87)

$        319

$        107

Promissory note payable issued in connection with an acquisition

$         —

$         —

$           —

$        198

Settlement of contingent consideration liability

$         33

$         —

$          33

$           —

Reconciliation of GAAP to Non-GAAP Results

(In millions, except percentages and per share amounts)

(Unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,

2016

2015

2016

2015

GAAP revenue

$    7,011

$    4,501

$    18,829

$    12,087

   Foreign exchange effect on 2016 revenue using 2015 rates

31

234

Revenue excluding foreign exchange effect

$    7,042

$    19,063

GAAP revenue year-over-year change %

56%

56%

Revenue excluding foreign exchange effect year-over-year change %

56%

58%

GAAP advertising revenue

$    6,816

$    4,299

$    18,256

$    11,442

   Foreign exchange effect on 2016 advertising revenue using 2015 rates

31

234

Advertising revenue excluding foreign exchange effect

$    6,847

$    18,490

GAAP advertising revenue year-over-year change %

59%

60%

Advertising revenue excluding foreign exchange effect year-over-year change %

59%

62%

GAAP costs and expenses

$    3,889

$    3,042

$    10,953

$      8,422

   Share-based compensation expense

(819)

(757)

(2,371)

(2,223)

   Payroll tax expenses related to share-based compensation

(20)

(14)

(81)

(51)

   Amortization of intangible assets

(195)

(180)

(568)

(539)

Non-GAAP costs and expenses

$    2,855

$    2,091

$      7,933

$      5,609

GAAP income from operations

$    3,122

$    1,459

$      7,876

$      3,665

   Share-based compensation expense

819

757

2,371

2,223

   Payroll tax expenses related to share-based compensation

20

14

81

51

   Amortization of intangible assets

195

180

568

539

Non-GAAP income from operations

$    4,156

$    2,410

$    10,896

$      6,478

GAAP net income

$    2,379

$       896

$      5,944

$      2,127

   Share-based compensation expense

819

757

2,371

2,223

   Payroll tax expenses related to share-based compensation

20

14

81

51

   Amortization of intangible assets

195

180

568

539

   Income tax adjustments

(245)

(219)

(746)

(687)

Non-GAAP net income

$    3,168

$    1,628

$      8,218

$      4,253

GAAP and Non-GAAP diluted shares

2,915

2,863

2,902

2,848

GAAP diluted earnings per share

$      0.82

$      0.31

$        2.05

$        0.75

   Non-GAAP adjustments to net income

0.27

0.26

0.78

0.75

Non-GAAP diluted earnings per share

$      1.09

$      0.57

$        2.83

$        1.50

GAAP operating margin

45%

32%

42%

30%

   Share-based compensation expense

12%

17%

13%

18%

   Payroll tax expenses related to share-based compensation

—%

—%

—%

—%

   Amortization of intangible assets

3%

4%

3%

4%

Non-GAAP operating margin

59%

54%

58%

54%

GAAP income before provision for income taxes

$    3,169

$    1,432

$      8,001

$      3,637

GAAP provision for income taxes

790

536

2,057

1,510

GAAP effective tax rate

25%

37%

26%

42%

GAAP income before provision for income taxes

$    3,169

$    1,432

$      8,001

$      3,637

   Share-based compensation and related payroll tax expenses

839

771

2,452

2,274

   Amortization of intangible assets

195

180

568

539

Non-GAAP income before provision for income taxes

$    4,203

$    2,383

$    11,021

$      6,450

Non-GAAP provision for income taxes

1,035

755

2,803

2,197

Non-GAAP effective tax rate

25%

32%

25%

34%

Net cash provided by operating activities

$    3,577

$    2,192

$      9,758

$      5,772

   Purchases of property and equipment

(1,095)

(780)

(3,222)

(1,831)

Free cash flow

$    2,482

$    1,412

$      6,536

$      3,941

STOP Spending Marketing Budget on Social Networks That Might Not Be Here in 5 Years

Social media is a subject that most businesses deal with more because they feel they have to than because they want to. The thinking is & should be – if you’re not at least making some effort in this key modern area of marketing you are losing ground on the competition.

Now before you go and blow your marketing budget on iffy fly by night & entirely self-anointed ‘social media gurus’ I suggest you consider the following: would you spend heavily on advertising only playable on BETAMAX in 1982? Or only playable on VHS in 1998? Is the sustainability & fundamental financial well-being of the platform not a consideration marketers should be considering before investing their marketing budgets – especially on organic (ie. non-paid advertising) footprint growth?

With a hypothetical budget of £100,000 to spend on marketing via social media this is how I’d suggest a median company should generally look to hedge their bets:

  1. Facebook – access to 1,280,000,000 registered users or 18.3% of humanity is an undeniably enormous marketing potential that all digital marketers & online businesses need to attempt to engage with. Whilst links are nofollow there remain 2,250,000,000 pages from Facebook indexed by Google. With a market capitalization of just under $270 billion Facebook Inc. aren’t going anywhere anytime soon either. It is thus fairly prudent to make medium to long term investment in a Facebook presence for your business. Recommended Budget Spend: £45,000.00.
  2. Google+ – with a market capitalization of nearly half a trillion dollars at a comparatively sensible sounding price to earnings ratio of 33.62:1 Google or Alphabet Inc. as the parent company is now called are both the largest and the most sustainable owners of any social media platform. However, social is but one of many areas the company invest in & their efforts here have proven frustrating at times & very much a secondary consideration to their core offering of search. Whilst Google are the most likely of all of the social media platform owners to be around and viable and significant in 5 years time Google+ specifically most certainly is not & as such some caution is recommended. Recommended Budget Spend: £15,000.00.
  3. Instagram – Instagram was thought to be bringing in around $595 million in revenue in 2015 making analysts valuation of $35 billion suitably ludicrous. As a Facebook owned entity, though, and one that has the personal support of Mark Zuckerberg the project should be around and buoyant for a long time to come. Recommended Budget Spend: £12,000.00.
  4. Twitter – Twitter, Inc. has failed to effectively monetize their massive traffic levels perhaps more severely than any other major internet ‘success’ story in recent memory. The platform remains very well used & as such fears over their financial well being should be counterbalanced by an appreciation for the here and now gains possible for the foreseeable future. Recommended Budget Spend: £8,000.00.
  5. LinkedInLinkedIn offer a great service to the professional world. They have, though, struggled to turn revenue into profits and as such despite a market capitalization of around $25 billion they are hardly an ultra sustainable business at this point. Recommended Budget Spend: £7,500.00.
  6. reddit – the site made $8,276,594.93 in revenue in 2014 & would appear to be fairly static in terms of traction although simultaneously appearing a suitably well supported entity with a loyal core fan base. Recommended Budget Spend: £5,000.00.
  7. Tumblr – even if Tumblr did manage $100 million in revenue in 2015, as has been claimed, there is a long way to go to remaining and gaining traction in an increasingly crowded social media landscape for the Yahoo! owned entity. The size of Yahoo!’s pockets and their enthusiasm for the division would imply a reasonable chance of sustainability if at a modest level. Bare in mind $100 million is around 2% of Yahoo!’s total revenue take in a given year. Recommended Budget Spend: £5,000.00.
  8. Pinterest – Pinterest forecast $169 million in revenue in 2015. Pinterest is making $1.44 per active user, based on that forecast. If, and that’s a big if, they managed to do that – and assuming normal profits at a 35% margin we have earnings of $59.15 million making its purported valuation of $11 billion indicative of a 185.96:1 – that is – typical boom-bust fodder. As of January 2015, there were 176 million registered users, but only 88 million active users. The 2015 projection thus expected an increase in both active users & revenue per active user. Recommended Budget Spend: £1,500.00.
  9. Yelp – Yelp Inc. have managed to eak out a profit of $8-9 million dollars per annum in recent times on investment of $1.7 billion one wonders how long investors will keep the faith. Recommended Budget Spend: £1,000.00.
  10. Foursquare – Dennis Crowley resigned as chief executive of Foursquare Inc. after struggling to turn the location-sharing mobile app into a profitable business over the six years since he started it – that news just in. Recommended Budget Spend: Nothing