Anticipating Facebook’s Capital Expenditure

We previously examined the composition of Facebook’s fixed assets. We visualized the historical costs of Facebook’s property and equipment, and we looked at the depreciation rates on its line items, and its accumulated depreciation in order to derive the net value of Facebook’s fixed assets. We are now in a position to assess Facebook’s capital expenditure (capex) for property and equipment.

Facebook’s reported capex is split between purchased property and equipment, and property and equipment acquired under capital lease. In its filings Facebook also tells us that it occasionally purchases property and equipment for which it obtains capital financing under sale-leaseback transactions. These leases are typically for three years, except for 15 year building leases, and other long term agreements.1

We can visualize Facebook’s yearly purchases and leases of property and equipment since 2007. Purchased and leased capital grew by 788% and 288%, respectively, from 2009 to 2010. Spending by Facebook on fixed assets grew at similar rates between 2010 and 2011. Although leased capital spending declined in 2012 capital spending still grew by as much as 103% over the previous year.

Facebook's yearly capital expenditure

As we learned previously network equipment and buildings comprise the bulk of Facebook’s currently held fixed assets. Much of Facebook’s expected $1.8 billion capex for FY 2013 will be directed to investment in servers, the construction of new data centers, and other network infrastructure. Despite its size, however, Facebook’s yearly capex growth rate has been declining since 2010. Facebook’s FY 2013 guidance shows capex increasing by only 12%.

Facebook’s capex guidance suggests that the company’s infrastructure is reaching maturity. We have already observed that Facebook’s mature region user base growth has reached a plateau. Although Facebook continues its transition to mobile, and continues to experience emerging market growth, we should expect to see continued deceleration in yearly capex as the company concludes data center construction in progress.

Despite its maturation, continual improvements to its data centers in Oregon, North Carolina, and Sweden will continue to drive Facebook’s capex. The depreciation rate for Facebook’s network equipment and other currently held fixed assets will create variability in quarterly capex. Patterns in quarterly spending either in terms of quarterly nominal dollars or the capital purchase-to-lease ratio will remain ambiguous in the short run.

Notes

  1. Form 10-Q, Facebook Inc., 2012., Form 8-K (various), Facebook Inc., 2012-2013.
  2. Update: during Facebook’s Q2 2013 earnings call, CFO David Ebersman commented that Facebook had revised its capex guidance for FY 2013. Facebook now expects to spend a more modest $1.6 billion, in line with capex in FY 2012. This suggests that our conclusion that infrastructure is reaching maturity is likely correct, as Ebersman stated that efficiency gains (economies of scale) and changes in purchases timing resulted in the revised guidance.