Archived entries for historical cost

Revisiting capex

When we last examined Facebook’s capex, we observed that year-over-year the company’s spending on property and equipment has been declining. We concluded that the reduction in network infrastructure spending reflected a maturation of the company’s infrastructure and platform. Facebook’s somewhat modest FY 2013 capex bears out this thesis. However, Facebook’s WhatsApp acquisition raises questions about capex going forward.

Facebook estimated that capex in 2013 would grow at only 12%, totalling an estimated $1.8B (later revised down to $1.6B). As we noted previously, this would reflect a slowing capex growth rate. In fact, a combination of efficiency investments on the hardware and the software side have further driven down realized capital spending in the year. According to its 10-K, as a result of these investments, total capex was a more modest $1.36B.

By tracking the historical cost of Facebook’s property and equipment we can see that the majority of capital spending is directed to growing or maintaining the company’s network infrastructure. This includes the purchase or lease of servers and other network equipment, and building costs for Facebook’s growing list of data centers. This also explains the bulk of the decline in capex over the year, with only a small increase in nominal cost in Q4 2013.

Facebook's quarterly property and equipment historical cost

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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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Continuance - Facebook Analysis by . @jonmilani. Copyright © 2020. All rights reserved. Hosted by (mt) Media Temple.