Archived entries for $FB

Incentives and the Mobile Payments Problem

We last looked at Facebook’s payments business in Q1 2013, where we observed a slight increase in payments revenue. Payments in the second and third quarters remained relatively flat across regions, reflecting seasonality. Facebook’s payments revenue in Q4 appears to be down 6% year-over-year; however, this is due to last year’s deferred revenue recognition. Despite the expected seasonal increase in Q4, payments growth actually saw approximately 27% growth over the year ago quarter.

Facebook’s payments business earned $241 million in the quarter, making up a modest 9.3% of its total $2.58 billion in revenue in the quarter. The lion’s share accrued to North America with $138 million, an approximately 6% increase over Q4 2012. Facebook’s largest year-over-year increase occurred in Europe, where revenue increased by 21%, from $56 million to $69 million. Payments revenue in Asia and rest of world regions remain relatively unchanged year-over-year.1

Facebook's payments business revenue by region

According to the company, after adjusting for a deferred revenue recognition, payments revenue from games grew 8% over the year ago quarter. Facebook noted that games revenue, which comprises the majority of its payments business, is limited to its desktop user base. And, that the desktop segment of its user base is declining. Facebook’s tacit admission that, despite games revenue growth, its payments business effectively monetizes an increasingly less important segment of its user base is telling.2

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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

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Facebook’s Property and Equipment

By examining Facebook’s income statement and balance sheet, we can better understand the company’s fixed assets. We can observe the sequential growth in the historical cost of property and equipment line items. We can also take a closer look at the depreciation rate for property and equipment, in order to derive a net value for Facebook’s fixed assets. In a later article we will examine capital expenditure (capex) for new property and equipment.1

Before we analyze Facebook’s capex, it is instructive to assess the composition and value of Facebook’s currently held property and equipment. In Q1 2013, the combined historical costs of Facebook’s fixed assets were $3.53 billion, an increase of 47.7% over the year ago quarter.2 The largest component of Facebook’s property and equipment is network equipment. In the first quarter the historical cost of Facebook’s network equipment passed $2 billion.3

Facebook's quarterly property and equipment historical cost

Facebook’s filings also reveal the depreciation rate for its fixed assets. For its network equipment, Facebook estimates that the useful life of its purchases and leases will be three to four years. Buildings will fully depreciate after 15 to 20 years. Computer software and office equipment will last two to five years. Leased equipment and leasehold improvements depreciate at a rate lesser to the useful life or remaining lease term. Land and construction in progress does not depreciate.

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An Uptick in Facebook’s Payments Business

As we noted in February, Facebook recorded an increase in payments revenue in the fourth quarter of 2012; however, the increase in payments revenue was the result of deferred revenue recognition. In fact, when accounting for the $66 million in deferred revenue, Facebook’s payments revenue remained essentially unchanged over the year ago quarter. We concluded that Facebook’s payments business has remained flat for the past five quarters.

However, Facebook’s Q1 2013 earnings shows a slightly different picture for Facebook’s payments business. According to its 10-Q, Facebook earned $213 million in revenue from payments and other fees, a 15% increase from the year ago quarter. According to the company, the uptick in quarterly payments revenue is primarily the result of increased games revenue, and to a lesser extent revenue from Promoted Posts and Gifts.1

Facebook’s payments revenue from games increased by 12%; however, the company admitted that when accounting for deferred revenue recognition in the fourth quarter, the increase in payments revenue over the year ago quarter was closer to 6%. Despite a 37% decline in bookings from Zynga, Facebook’s largest games developer, the company still enjoyed a 60% increase in games-related payments volumes.

Facebook's payments business revenue by region

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Continuance - Facebook Analysis by . @jonmilani. Copyright © 2017. All rights reserved. Hosted by (mt) Media Temple.