Facebook generated ~$250 million of net income in the fourth quarter of 2010, two sources briefed on Facebook's finances tell us.
Previous reports say Facebook profited $355 million over 2010's first 9 months. That puts Facebook's total 2010 profits at $600 million.
These sources say the company is on track to generate about $2 billion of EBITDA in 2011 (earnings before interest, taxes, depreciation and amortization). One of these sources says Facebook revenues will surpass $4 billion in 2011.
Facebook declined to comment on this story.
The projections are just projections, obviously, and Facebook probably isn't very concerned with generating cash at this point. Even if revenue comes in as expected, Facebook could spend big money on servers, new headquarters, new employees, or even big acquisitions and chew through that cash flow quickly.
Facebook makes most of its money off brand advertising, ads that send users to virtual games like CityVille and goup-buying sites, and a 30% tax on Facebook credits.
Facebook sold $1.5 billion worth of new stock to Goldman Sachs and its clients in January at a $50 billion valuation. Today, Kara Swisher reported that "big institutional investors" are asking Facebook if they can buy $1 billion worth of stock at $60 billion valuation.
The $2 billion EBITDA figure has several investors we spoke to giddy. One remarked that a 25-to-1 PE ratio makes Goldman's $50 billion valuation of Facebook too cheap to pass up (earnings aren't the same thing as EBITDA, but who's counting).
And the excitement about the company is obviously warranted: Facebook's a monster.
But for all those who are now convinced that Facebook is "the next Google" (or better), it's also worth looking at the chart below.
Facebook first started generated revenues in 2006. This chart compares the early revenue growth of Yahoo, Facebook, and Google. It shows that while Facebook is growing like crazy, it's revenues aren't growing nearly so fast as Google's did during its first seven years.
COMMENTARY: In a previous blog posting dated January 28, 2011 titled, "What Facebook Must Do To Justify Its Outrageous Valuation, Can't Do It Strictly With Ads", I pointed out Facebook's very low Revenue Per Unique User (below) of less than $4.00 as a main reason why Facebook needs other sources of revenue besides brand advertising.
I am impressed with Facebook's earnings before interest, taxes, depreciation and amortization of approximately $600 million (net profit) for the year 2010, and $2 billion EBITDA projected for 2011. The latter is based on "unidentified sources".
Since we don't have any precise revenue and operating expense breakdowns, it is difficult to gauge how Facebook's EBITDA is calculated. These are just projections, and only Facebook's investor's know for sure.
After only a year and a half, Facebook has outgrown its offices in Palo Alto, reports TechCrunch. The social networking site will be moving to closeby Menlo Park. The new facility, which used to house Sun Microsystems, is composed of 11 buildings over 57 acres, with an additional 22 acres of offices connected to the complex by tunnel. It should be able to hold at least 3,700 employees. Facebook currently has about 1,400 employees in its Palo Alto offices and an additional 600 around the world.
Facebook's staff has been growing at a 50% pace per year, and its present HQ is just too small for new employees. If its present staff grows by 50% in 2011, it should have 3,000 employees by year-end 2011. Most of them will be housed in the new Menlo Park location.
Having said this, Facebook's expenses are artificially low due to limits the old facility in Palo Alto places on staffing and capital expenditures for new servers and computers. Facebook's expenses should grow substantially in 2011 due to the new hires, moving expenses, capital expenditures and increased facility costs (rent, maintenance, etc.) associated with the new HQ. This should have a significant impact on Facebook's earnings. Whether that $2 billion EBITDA reflects these new costs is not known.
In any event, Facebook needs new sources of revenue besides brand advertising. Social games are included in its current and future revenues, but Facebook only gets a 30% cut from Zynga (which represents about 80% of total social game revenues) and other social game developers.
My understanding is that Facebook generated $1.860 billion in gross revenues in 2010. I am assuming that most of that is from brand advertising, and only a very small portion is from social games. If you work the math using Facebook's average revenue per user of $3.62, a figure that SAI Business Insider calculated, this works out to $1.8 billion in gross revenues. So I buy that $1.860 billion in gross revenues reported earlier.
If this we assume that the average revenue per user of $3.62 is only from advertising, and if you believe that Facebook will do $4 billion in revenues in 2011, then this computes to 1.1 billion users ($4 billon/$3.62) by the end of 2011. Facebook claims that it presently has 600 million users. This would mean that it would need to gain an additional 500 million members by the end of 2011. I just don't think that they can signup that many new members. I think they might get to 800 million, mostly because they are shutout of China, and in the very low single digits in India, Brazil, Japan and So Korea. They really need China and a breakthrough in India to reach 1.1 billion, and even then I don't believe that they can do that.
If you have followed my math so far, and we assume that they only reach 800 million members by the end of 2011, then their revenues from advertising will be $2.896 billion. Unidentified sources believe they can do $4 billion. Facebook falls short by $1.1 billion. Those additional revenues will have to come from other sources. Maybe they can, maybe they can't.
I argue that they won't be able to generate those additional $1.1 billion in revenues from social games and Facebook Places, their location-based check-in service, which has been mostly a huge failure. I will be very surprised if they do $200 million from those two revenue sources. This leaves them $900 million short. Where is that additional revenue going to come from?
From my previous blog post (see above link), Facebook should be able to generate revenues from commissons on advertising placed through a new ad network, fees from non-virtual goods, voice and video chat. They might be ale to do that $900 million from a new ad network, but if we use a 30% split, that means they would need to place $3 billion in additional advertising through that ad network. I don't believe that they can do it. No other ad network that I know of is doing those kind of numbers. Not even close. They will also be competing with about 60 other ad networks. You can find a very comprehensive list in a previous blog post dated November 7, 2010 titled, "An Industry Overview of Advertising Networks: What They Do And The Markets They Serve."
Total online advertising for the first six months of 2010 was about $12 billion. Let's double that for the entire year. This works out to $25 billion online advertising. Facebook would have to capture $3 billion or 12% of the total. They have room to increase their ad revenues, but most of it will be internationally. About $950 million or 50% of their total ad revenues came from overseas in 2010. I have already factored this international growth in my previous advertiising revenue calculations, so I am confused as to wherre that $900 million will come from.
I am not as optimistic about that $4 billion in gross revenues that has been projected. I believe it will be closer to $3.5 billion, and I am being somewhat generous, but we won't know for at least another year. Facebook could make some major acquisitions, it certainly has the capital to do that, and maybe those sources will allow it to reach $4 billion for 2011, but that's pretty iffy. It could acquire LinkedIn, Groupon or Zynga, but alll of them have announced plans to file IPO's. And Facebook doesn't have sufficient capital to buy any of them.
I guess we will just have to wait until the end of 2011, to see how close I come. If you have a better idea, please share it with me.
Courtesy of an article dated February 10, 2011 appearing in SAI Business Insider, an article dated February 8, 2011 appearing in Mail Online, and an article dated February 9, 2011 appearing in Yahoo News
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