2013-01-30

Those Facebook Q4 results

At the time of writing, Facebook is down about 3.5% in after-hours trading, bouncing up and down as investors try to work out how they feel about the FB Q4 2012 results. I've had a look through, and can sympathise - I can't make my mind up either.

The main takeaway I get from the FB results is that revenue is up, $5.1bn for 2012 compared to $3.7bn for 2011, but it's costing them a lot more to get that revenue; costs of $4.5bn were much greater than $2bn last year. From the breakdown, cost of revenue was proportionately slightly down, but marketing + sales and "general admin" way more than doubled from 2011 to 2012, and R+D at $1.3bn was up by a factor of 3.6, which is huge. What does Facebook buy with its R+D money? It's talent - this is almost certainly mostly compensation: salaries and share allocations. Share-based compensation expense in R+D jumped from $114mm to $843mm. They've doubtless got a lot more engineers, and they're having to pay them well in a thriving Silicon Valley market. Zuckerberg announced on the earnings call that FB intends to hire more engineers in 2013 and in 2012 added 1,419 employees to the previous 3,200 employees; nearly 50% growth already. If you're paying your average engineer $200K in salary and benefits, which seems low for Bay Area salaries, that's $280 million you've just added to your annual payroll. And the problem with adding a lot of employees is that it's a recurring cost - you can't easily shrink wages, and if you start to fire significant numbers of them then you're going to alarm the markets.

Something else I find interesting for its absence is information on how much FB is spending on building and running its data centers. Reasonably solid estimates based on power usage placed them at 180,000 servers in mid-2012, up sharply from an estimated 30,000 in 2009. That's still a lot less than Google's estimated 1 million (based on the same methodology) but it must be a serious draw in power and maintenance, not to mention capital expenditure. From a first glance through the figures though, it doesn't look like they're now spending a lot of money in that area. If you figure a single server costs you $1500 (guess) and you put, say, 20,000 in a building (I don't know if FB has 9 data centers but that sounds about right) then that's $30 million on servers plus probably twice that in associated infrastructure (say, a round $100 million per data center) and you figure on writing off that cost over 5 years, that's $180 million per year for the nine data centers.

I can understand FB putting all this money into obtaining talent - they want to find the next big thing, monetise mobile, find new markets. To keep their shareholders happy, however, they're going to need to show some impressive results fairly soon. This is not the dot.com boom any more. On the other hand, they have 600 million users using FB in some way every day; quantity has a quality all of its own.

This, obviously, is not investment advice. I have no idea what I'm doing. You'd be mad to pay any attention to me. Do your own diligence, seek out a paid professional, etc.

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