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Facebook bares business soul in IPO filing

Published:Friday | February 3, 2012 | 12:00 AM

The unveiling came late Wednesday when the company filed its plans to raise US$5 billion in an initial public offering of stock.

It's a revelatory moment that prospective investors, curious competitors and nosy reporters have been awaiting for two years.

During that time, Facebook established itself as a communications hub and emerged as a threat to the Internet's most powerful company, Google Inc.

As with almost anything crafted by a bunch of lawyers and bankers, the 197-page prospectus that Facebook filed with the Securities and Exchange Commission is filled with boilerplate legalese and mind-numbing numbers.

But there were some juicy details in there, too.

Above all, the documents confirmed what everyone had been hearing: Facebook is very profitable and getting stronger.

The company Mark Zuckerberg started with some friends in 2004 has seen its annual revenue soar from US$777 million in 2009 to US$3.7 billion last year. Facebook's earnings have grown at a similar rate too, ballooning from US$122 million in 2009 to US$668 million last year.

Facebook ended 2011 with US$3.9 billion in cash. That's a relatively small amount compared to the nearly US$45 billion that Google has in the bank.

Facebook ended last year with 845 million users, up 39 per cent from 608 million at the end of 2010.

Facebook has become so addictive that more than half its audience - 483 million users - log in every day.

Facebook's revenue total disappointed some people who pored through the documents. One reason: The company generates about US$4.39 in revenue per user.

"That is a surprisingly low number," said University of Notre Dame finance professor Tim Loughran, who studies IPOs. Google's annual revenue of nearly US$38 billion works out to more than $30 per user of its services.

"Facebook needs to find more ways to get revenue from their users," Loughran said.

Most promising expansion

Facebook listed its most promising expansion opportunities as Brazil, Germany, India, Japan, Russia and South Korea.

The company, based in California, eventually hopes to make its service available in China if it can navigate rules requiring online content to be censored if the Chinese government considers it to be objectionable or obscene.

The IPO filing gives some clue when Facebook is likely to surpass one billion users. If it can add users at roughly the same pace as last year, Facebook should surpass the one billion mark this summer.

The company is also developing other sources of revenue beyond online advertising faster than Google.

Advertising accounted for 85 per cent of Facebook's revenue last year. It made up 96 per cent of Google's. Facebook's other revenue sources include the 30 per cent cut of sales it takes from game makers and other external applications companies that sell things on its website.
The big question is whether Facebook's numbers are impressive enough to fetch the lofty IPO price.

It's still too early in the process for Facebook to reveal how much it intends to ask for its shares, but Wednesday's filing provides some clues.

Facebook valued its Class B common stock at US$29.73 at the end of December, down slightly from appraisals of US$30.07 in June and September.

If this unfolds like most hot IPOs, Facebook will probably try to sell its shares at a premium. That could mean an IPO price in the US$35 to US$40 range. Investor demand, though, ultimately will dictate the pricing.

Financial notes in the filing show Facebook calculated it had about 2.9 billion fully diluted shares at the end of December. That works out to a market value of about US$86 billion, based on Facebook's US$29.73-per-share self-appraisal.

- AP