Private Placement of Facebook
Facebook numbers draw Google comparison
SAN FRANCISCO (MarketWatch) — One common question around Silicon Valley over the last couple of years: Is Facebook the next Google?
Limited financial data disclosed to potential investors suggest that it could be. A document shared with prospective investors in a $1.5 billion private placement of Facebook shares conducted by Goldman Sachs Group Inc., and reviewed by MarketWatch, indicates that the seven-year-old social networking service has already become remarkably profitable.
Facebook’s operating margin, a key measure of efficiency, was roughly 48% for the first nine months of last year, according to the Goldman document.
That compares favorably to investor darling Google Inc. /quotes/comstock/15*!goog/quotes/nls/goog (GOOG 625.89, -5.86, -0.93%) , which had a roughly 40% operating margin when it first opened its books to the public prior to its 2004 IPO.
“The financial profile of Facebook looks eerily similar to the financial profile that Google had in 2004,“ Citigroup analyst Mark Mahaney said in an interview.
Mahaney said other disclosed figures that draw comparisons to Google include Facebook’s apparent annual revenue growth rate of well over 100%.
For the first nine months of last year, Facebook saw revenue rise nearly 180% to roughly $1.2 billion, from almost $450 million in the same period a year earlier, according to the Goldman offering document. Meanwhile net income rose to over $350 million from less than $50 million. Closely-held Facebook notes that its figures for last year are unaudited.
Google, which now pulls in over $20 billion in revenue annually, posted a 140% revenue gain between the first six months of 2003 and the same period in 2004, prior to its IPO in August of that year.
Facebook tells prospective investors in the Goldman offering document that it plans to either be a publicly-traded company, or to be required to make public financial disclosures due to its growing number of shareholders, by April of next year.
A Facebook spokesman declined to comment.
Palo Alto, Calif.-based Facebook has attracted well over 500 million users, and relies on online advertising for much of its revenue.
In the Goldman offering document, Facebook says it had over $1 billion in cash and equivalents as of last year. As Google geared up for its IPO, it disclosed having nearly $550 million in cash and equivalents, or about $635 million in 2011 dollars.
Facebook’s apparently high level of profitability may not last, however.
While Google’s operating margin has remained relatively constant, Yahoo Inc. /quotes/comstock/15*!yhoo/quotes/nls/yhoo (YHOO 16.15, -0.16, -0.97%) , which also competes in the online advertising market, has struggled to maintain its profitability. Yahoo CEO Carol Bartz has pledged to raise the company’s operating margin to as high as 24% by 2013, from its current level of around 12%.
One of Facebook’s most prominent costs as it grows is likely to be the addition of data centers necessary to support its services.
The company disclosed in the Goldman /quotes/comstock/13*!gs/quotes/nls/gs (GS 165.25, -1.24, -0.75%) offering document that providing its services “is costly and its expenses are expected to continue to increase in the future as Facebook broadens its user base.“
Facebook is now building a massive data center in central Oregon, and has announced plans to build another facility in North Carolina. See Facebook data center revitalizes Oregon town,
Facebook’s total costs and expenses for the first nine months of last year amounted to roughly $650 million, compared to about $350 million in the same period in 2009, according disclosures in the Goldman document.
Facebook’s financial disclosures in the memo have drawn intense scrutiny.
Goldman said earlier this week that due to concerns that “the level of media attention might not be consistent with the proper completion of a U.S. private placement under U.S. law,” the Facebook placement will be available only to investors abroad.
BGC Partners analyst Colin Gillis said the profitability demonstrated in Facebook’s reported numbers is a bit surprising, given that it’s is still in a relatively early stage of growth. However, Gillis said profitability may not be the most important thing for a company at Facebook’s age.
“Typically, for a high growth business, you try to run it around break even,” in order to chase after as much revenue as possible, Gillis said. “You could make the argument that these guys aren’t spending fast enough.”
While Facebook will inevitably be faced with mounting costs as it takes on more employees and adds computing power, Gillis said it seems poised to continue offering a unique opportunity for online advertisers. “Where else are you going to advertise if you want to tap the social grid?,” he asked.
However, Gillis also suggested that a little perspective is in order.
While Facebook’s $1.2 billion in disclosed revenue for the first nine months of last year has raised some eyebrows, Gillis noted that Yahoo — a company widely seen as being on the decline of late — is expected to report net revenue, minus payments made to acquire traffic, of $1.2 billion for the period ended in December.
“And that’s just in one quarter,” the analyst noted.
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