FB: Facebook Analysis and Research Report

2018-04-15 - by Asif , Contributing Analyst - 73 views

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Overview

The company's mission is to give people the power to build community and bring the world closer together.

The company's top priority is to build useful and engaging products that enable people to connect and share with friends and family through mobile devices, personal computers, and other surfaces. The company also help people discover and learn about what is going on in the world around them, enable people to share their opinions, ideas, photos and videos, and other activities with audiences ranging from their closest friends to the public at large, and stay connected everywhere by accessing its products, including:

  • Facebook enables people to connect, share, discover, and communicate with each other on mobile devices and personal computers. 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 community for sharing visual stories through photos, videos, and direct messages. Instagram is also a place for people to stay connected with the interests and communities that they care about.
  • Messenger. Messenger is a messaging application that makes it easy for people to connect with other people, groups and businesses across a variety of platforms and devices.
  • WhatsApp. WhatsApp is a fast, simple, and reliable messaging application that is used by people around the world to connect securely and privately.
  • Oculus. The company's Oculus virtual reality technology and content platform power products that allow people to enter a completely immersive and interactive environment to train, learn, play games, consume content, and connect with others.

The company generate substantially all of its revenue from selling advertising placements to marketers. The company's ads enable marketers to reach people based on a variety of factors including age, gender, location, interests, and behaviors. Marketers purchase ads that can appear in multiple places including on Facebook, Instagram, Messenger, and third-party applications and websites.

Facebook is also investing in a number of longer-term initiatives, such as connectivity efforts, artificial intelligence research, and augmented and virtual reality, to develop technologies that the company believe will help it better serve its communities and pursue its mission to give people the power to build community and bring the world closer together.

Competition

The company's business is characterized by innovation, rapid change, and disruptive technologies. The company compete with companies that sell advertising, as well as with companies that provide social, media, and communication products and services that are designed to engage users on mobile devices and online. The company face significant competition in every aspect of its business, including from companies that facilitate communication and the sharing of content and information, companies that enable marketers to display advertising, companies that distribute video and other forms of media content, and companies that provide development platforms for applications developers. The company compete to attract, engage, and retain people who use its products, to attract and retain marketers, and to attract and retain developers to build compelling mobile and web applications that integrate with its products.

The company also compete with the following:

  • Companies that offer products across broad platforms that replicate capabilities the company provide. For example, Google has integrated social functionality into a number of its products, including search, video, and Android.
  • Companies that develop applications, particularly mobile applications, that provide social or other communications functionality, such as messaging, photo- and video-sharing, and micro-blogging.
  • Companies that provide regional social networks that have strong positions in particular countries.
  • Traditional, online, and mobile businesses that provide media for marketers to reach their audiences and/or develop tools and systems for managing and optimizing advertising campaigns.
  • Companies that develop and deliver virtual reality products and services.

As the company introduce or acquire new products, as its existing products evolve, or as other companies introduce new products and services, the company may become subject to additional competition.

Technology

The company's product development philosophy is centered on continuous innovation in creating and improving products that are social by design, which means that its products are designed to place people and their social interactions at the core of the product experience. As its user base grows, and the level of engagement from the people who use its products continues to increase, including with video, its computing needs continue to expand. The company make significant investments in technology both to improve its existing products and services and to develop new ones, as well as for its marketers and developers. Facebook is also investing in protecting the security and integrity of its platform by investing in both people and technology to strengthen its systems against abuse.

The company's technology investments included research and development expenses of $7.75 billion, $5.92 billion and $4.82 billion in 2017, 2016 and 2015, respectively. For information about its research and development expenses, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Research and development" of this Annual Report on Form 10-K.

Sales and Operations

The majority of its marketers use its self-service ad platform to launch and manage their advertising campaigns. The company also have a global sales force that is focused on attracting and retaining advertisers and providing support to them throughout the stages of the marketing cycle from pre-purchase decision-making to real-time optimizations to post-campaign analytics. The company work directly with these advertisers, through traditional advertising agencies, and with an ecosystem of specialized agencies and partners. The company currently operate six support offices and more than 40 sales offices around the globe. The company also invest in and rely on self-service tools to provide direct customer support to its users and partners.

Marketing

To date, its communities have grown organically with people inviting their friends to connect with them, supported by internal efforts to stimulate awareness and interest. In addition, Facebook has invested and will continue to invest in marketing its products and services to build its brand, grow its user base, and increase engagement around the world. The company leverage the utility of its products and its social distribution channels as its most effective marketing tools.

Intellectual Property

To establish and protect its proprietary rights, the company rely on a combination of patents, trademarks, copyrights, trade secrets, including know-how, license agreements, confidentiality procedures, non-disclosure agreements with third parties, employee disclosure and invention assignment agreements, and other contractual rights. In addition, to further protect its proprietary rights, from time to time Facebook has purchased patents and patent applications from third parties. The company do not believe that its proprietary technology is dependent on any single patent or copyright or groups of related patents or copyrights. The company believe the duration of its patents is adequate relative to the expected lives of its products.

Government Regulation

Facebook is subject to a number of U.S. federal and state and foreign laws and regulations that affect companies conducting business on the Internet. Many of these laws and regulations are still evolving and being tested in courts, and could be interpreted in ways that could harm its business. These may involve user privacy, data protection and personal information, rights of publicity, content, intellectual property, advertising, marketing, distribution, data security, data retention and deletion, electronic contracts and other communications, competition, protection of minors, consumer protection, telecommunications, product liability, taxation, economic or other trade prohibitions or sanctions, securities law compliance, and online payment services. In particular, Facebook is subject to federal, state, and foreign laws regarding privacy and protection of people's data. Foreign data protection, privacy, content, competition, and other laws and regulations can be more restrictive than those in the United States. U.S. federal and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which the company operate, and may be interpreted and applied inconsistently from country to country and inconsistently with its current policies and practices.

Proposed or new legislation and regulations could also significantly affect its business. There currently are a number of proposals pending before federal, state, and foreign legislative and regulatory bodies. In addition, the new European General Data Protection Regulation (GDPR) will take effect in May 2018 and will apply to all of its products and services that provide service in Europe. The GDPR will include operational requirements for companies that receive or process personal data of residents of the European Union that are different than those currently in place in the European Union, and will include significant penalties for non-compliance. Similarly, there are a number of legislative proposals in the United States, at both the federal and state level, that could impose new obligations in areas affecting its business, such as liability for copyright infringement by third parties. In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering its services.

Facebook is currently, and may in the future be, subject to regulatory orders or consent decrees. Violation of existing or future regulatory orders or consent decrees could subject it to substantial monetary fines and other penalties that could negatively affect its financial condition and results of operations.

Various laws and regulations in the United States and abroad, such as the U.S. Bank Secrecy Act, the Dodd-Frank Act, the USA PATRIOT Act, and the Credit CARD Act, impose certain anti-money laundering requirements on companies that are financial institutions or that provide financial products and services. Under these laws and regulations, financial institutions are broadly defined to include money services businesses such as money transmitters, check cashers, and sellers or issuers of stored value or prepaid access products. Requirements imposed on financial institutions under these laws include customer identification and verification programs, record retention policies and procedures, and transaction reporting. To increase flexibility in how its online payments infrastructure (Payments) may evolve and to mitigate regulatory uncertainty, Facebook has received certain money transmitter licenses in the United States and an Electronic Money (E-Money) license that allows it to conduct certain regulated payment activities in the participating member countries of the European Economic Area, which will generally require it to demonstrate compliance with many domestic and foreign laws relating to money transmission, gift cards and other prepaid access instruments, electronic funds transfers, anti-money laundering, charitable fundraising, counter-terrorist financing, gambling, banking and lending, financial privacy and data security, and import and export restrictions.

Employees

As of December 31, 2017, the company had 25,105 employees.

Executive Overview of Full Year 2017 Results

The company's key user metrics and financial results for 2017 are as follows:

User growth:

  • Daily active users (DAUs) were 1.40 billion on average for December 2017, an increase of 14% year-over-year.
  • Monthly active users (MAUs) were 2.13 billion as of December 31, 2017, an increase of 14% year-over-year.

Financial results:

  • Revenue was $40.65 billion, up 47% year-over-year, and ad revenue was $39.94 billion, up 49% year-over-year.
  • Total costs and expenses were $20.45 billion.
  • Income from operations was $20.20 billion.
  • Net income was $15.93 billion with diluted earnings per share of $5.39.
  • Capital expenditures were $6.73 billion.
  • Effective tax rate was 23%.
  • Cash and cash equivalents, and marketable securities were $41.71 billion as of December 31, 2017.
  • Headcount was 25,105 as of December 31, 2017.

In 2017, the company continued to focus on its three main revenue growth priorities: (i) helping businesses expand their use of its mobile products, (ii) developing innovative ad products that help businesses get the most of their ad campaigns, and (iii) making its ads more relevant and effective through its targeting capabilities and outcome-based measurement.

The company continued to invest, based on its roadmap, in: (i) its most developed ecosystem, the Facebook app and platform as well as video, (ii) driving growth and building ecosystems around its products and features that already have significant user bases, such as Instagram, Messenger, and WhatsApp, and (iii) long-term technology initiatives, such as connectivity, artificial intelligence, and augmented and virtual reality, that the company believe will further its mission to give people the power to build community and bring the world closer together. The company intend to continue to invest based on this roadmap and the company anticipate that additional investments in the following areas will drive significant year-over-year expense growth in 2018: (i) increased investments in security, video content, and its long-term technology initiatives, and (ii) scaling its headcount and expanding its data center capacity and office facilities to support its growth.

Trends in The company's User Metrics

The numbers for its key metrics, its DAUs, MAUs, and average revenue per user (ARPU), do not include Instagram, WhatsApp, or Oculus users unless they would otherwise qualify as such users, respectively, based on their other activities on Facebook. In addition, other user engagement metrics do not include Instagram, WhatsApp, or Oculus unless otherwise specifically stated.

Trends in the number of users affect its revenue and financial results by influencing the number of ads Facebook is able to show, the value of its ads to marketers, the volume of Payments transactions, as well as its expenses and capital expenditures. Substantially all of its daily and monthly active users (as defined below) access Facebook on mobile devices.

Daily Active Users (DAUs). The company define a daily active user as a registered Facebook user who logged in and visited Facebook through its website or a mobile device, or used its Messenger application (and is also a registered Facebook user), on a given day. The company view DAUs, and DAUs as a percentage of MAUs, as measures of user engagement.

Note: For purposes of reporting DAUs, MAUs, and ARPU by geographic region, Europe includes all users in Russia and Turkey and Rest of World includes all users in Africa, Latin America, and the Middle East.

Worldwide DAUs increased 14% to 1.40 billion on average during December 2017 from 1.23 billion during December 2016. Users in India, Indonesia, and Brazil represented key sources of growth in DAUs during December 2017, relative to the same period in 2016.

Monthly Active Users (MAUs). The company define a monthly active user as a registered Facebook user who logged in and visited Facebook through its website or a mobile device, or used its Messenger application (and is also a registered Facebook user), in the last 30 days as of the date of measurement. MAUs are a measure of the size of its global active user community.

as of December 31, 2017, the company had 2.13 billion MAUs, an increase of 14% from December 31, 2016. Users in India, Indonesia, and Vietnam represented key sources of growth in 2017, relative to the same period in 2016.

Trends in The company's Monetization by User Geography

The company calculate its revenue by user geography based on its estimate of the geography in which ad impressions are delivered, virtual and digital goods are purchased, or virtual reality platform devices are shipped. The company define ARPU as its total revenue in a given geography during a given quarter, divided by the average of the number of MAUs in the geography at the beginning and end of the quarter. While ARPU includes all sources of revenue, the number of MAUs used in this calculation only includes users of Facebook and Messenger as described in the definition of MAU above. Revenue from users who are not also Facebook or Messenger MAUs was not material. The geography of its users affects its revenue and financial results because the company currently monetize users in different geographies at different average rates. The company's revenue and ARPU in regions such as United States & Canada and Europe are relatively higher primarily due to the size and maturity of those online and mobile advertising markets. For example, ARPU in 2017 in the United States & Canada region was more than nine times higher than in the Asia-Pacific region.

Note: The company's revenue by user geography in the charts above is geographically apportioned based on its estimation of the geographic location of its users when they perform a revenue-generating activity. This allocation differs from its revenue by geography disclosure in its consolidated financial statements where revenue is geographically apportioned based on the location of the marketer or developer.

For 2017, worldwide ARPU was $20.21, an increase of 26% from 2016. Over this period, ARPU increased by 41% in Europe, 36% in United States & Canada, 33% in Rest of World, and 22% in Asia-Pacific. In addition, user growth was more rapid in geographies with relatively lower ARPU, such as Asia-Pacific and Rest of World. The company expect that user growth in the future will be primarily concentrated in those regions where ARPU is relatively lower, such that worldwide ARPU may continue to increase at a slower rate relative to ARPU in any geographic region, or potentially decrease even if ARPU increases in each geographic region.


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