facebook initiation

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North America Equity Research27 June 2012

Facebook

Initiation

OverweightFB, FB US

The Social Infrastructure of the Web; Initiating at Overweight with $45 Price Target

Price: $33.10

Price Target: $45.00

Internet

Doug Anmuth AC

(1-212) 622-6571

[email protected]

Kaizad Gotla, CFA

(1-212) 622-6436

[email protected]

Bo Nam

(1-212) 622-5032

[email protected]

Shelby Taffer

(212) 622-6518

[email protected]

J.P. Morgan Securities LLC

YTD 1m 3m 12mAbs -13.0% 6.6% -13.0% -13.0%Rel -16.8% 5.9% -7.5% -16.0%

Facebook Inc. (FB;FB US)

FYE Dec 2011A 2012E 2013E 2014EEPS Reported ($)Q1 (Mar) 0.10 0.12A 0.14 -Q2 (Jun) 0.12 0.11 0.15 -Q3 (Sep) 0.12 0.12 0.16 -Q4 (Dec) 0.16 0.14 0.20 -FY 0.51 0.50 0.66 0.92Bloomberg EPS FY ($) - 0.52 0.66 0.87Source: Company data, Bloomberg, J.P. Morgan estimates.

Company DataPrice ($) 33.10Date Of Price 26 Jun 1252-week Range ($) 45.00 - 25.52Mkt Cap ($ mn) 86,821.30Fiscal Year End DecShares O/S (mn) 2,623Price Target ($) 45.00Price Target End Date 31 Dec 13

See page 58 for analyst certification and important disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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We are initiating coverage of Facebook with an Overweight rating and year-end 2013 price target of $45. As the underlying social fabric of the Web, Facebook is a unique platform asset with strong network effects, a deep competitive moat, and unparalleled social context. We believe the next phase of the Internet will be driven by data and powered by ubiquitous online access, and Facebook is well positioned here through its large and engaged user base, virtual ownership of the social graph, and unwavering focus on the user experience.

Facebook ad platform growing stronger. While Street focus is likely on the shift toward mobile usage, we point out that Facebook’s advertising platform is also in the midst of an important transition—ads are becoming more social, they are more prevalent in the News Feed, and the Facebook Ad Exchange should increase advertiser demand and inventory yield.

Early feedback on Sponsored Stories is positive. Based on our checks we are increasingly bullish on Sponsored Stories in the News Feed on both desktop and mobile. Early data suggests click-through rates and eCPMs for both are several times those of Facebook’s traditional desktop ads.

Mobile monetization may be better than people expect. Facebook likely will continue to roll out mobile ads in a measured manner going forward, but we believeSponsored Stories in the mobile News Feed have been turned on more in just the past few weeks and initial results appear positive. Our analysis suggests mobile could become a $300M-$500M quarterly revenue opportunity for Facebook in the next 2-4 quarters as higher pricing and visit frequency offset fewer overall impressions.

We expect growth to trough in 2Q and reaccelerate in 2H12 and into 2013. We project 2Q12 revenue of $1.1B (+24% Y/Y) and EBITDA of $587M (+6%, 53.1% margin), but we expect revenue to reaccelerate and margins to expand modestly Q/Q in the back half driven largely by continued solid user growth and newer ad formats. We project 2012-2015 three-year CAGRs of 33% for revenue and 35% for EBITDA.

Overweight rating and $45 PT. Our year-end 2013 price target of $45 is based on an average of two methodologies: 1) 17x 2014E EBITDA of $5.0B which yields $39; and 2) our DCF analysis utilizing a 3% terminal growth rate and an 11% WACC which yields $51.

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Doug Anmuth(1-212) [email protected]

Table of Contents

Investment Thesis ....................................................................3

Risks to Rating and Price Target ............................................4

Company Description ..............................................................5

Key Questions ..........................................................................6

Can Advertising Monetization Increase Meaningfully? ............................................6

How Is Mobile Impacting FB Users and Revenue? ................................................12

How Much Ad Revenue Could Mobile Generate?..................................................14

Can Facebook Deliver Meaningful ROI for Advertisers? .......................................16

Can Payments Evolve Beyond Gaming?................................................................18

Will Facebook Get Into Search? ............................................................................20

Will Facebook Build an Ad Network? ...................................................................22

Social Infrastructure Creates Options ..................................23

Large Global Market Opportunity..........................................27

Global User Growth ..............................................................................................27

Advertising Market ...............................................................................................28

Payments ..............................................................................................................30

Culture and Management.......................................................31

Key Facebook Products and Features .................................32

Key User Products ................................................................................................33

Key Advertiser Products........................................................................................33

Key Developer Products........................................................................................35

Current Business....................................................................37

User Growth and Engagement ...............................................................................37

Advertising ...........................................................................................................37

Payments ..............................................................................................................41

Financial Outlook ...................................................................43

Early Lock-Up Expirations Could Create Volatility in the Near Term ....................46

Valuation .................................................................................47

Financial Models.....................................................................50

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Investment Thesis

Facebook is the premier social layer of the Internet

We believe Facebook’s virtual ownership of the social graph puts the company in a unique position to influence the way people interact, communicate, and live their lives. Facebook’s mission is to make the world more open and connected, and we believe the company achieves this goal through its massive base of more than 900M users, its innovative products and tools, and substantial network effects. Facebook brings people closer together and can add a social layer to nearly everything peopledo, both online and offline. We believe Facebook’s virtual ownership of the social graph, strong competitive moat, and unwavering focus on the user experience position the company to significantly improve monetization over time and to become an enduring, blue-chip company built for the long term.

Massive reach and engagement drive network effects

Facebook’s strong reach and engagement drive powerful network effects which we believe will make it incredibly difficult for direct social competitors to gain any meaningful share. With more than 900M monthly active users (MAUs), Facebook reaches ~13% of the world’s population and nearly 40% of global Internet users—and we still expect 35%+ user growth this year in Asia and Rest of World (ROW). In terms of engagement, 526M daily active users (DAUs) or nearly 60% of users visit Facebook any given day. And Facebook users account for one of every seven minutes spent online, or 14% of total Internet time. Monthly mobile users total 488M, or 54% of Facebook’s overall user base, and despite the associated near-term revenue headwinds, we believe ubiquity of devices and increased engagement through mobile will be strong positives for the company over the long term.

Targeting abilities provide significant value to advertisers, and still early

Beyond Facebook’s broad reach and scale highlighted above, the company’s mapping of the social graph yields valuable information for brands and advertisers that is highly differentiated and difficult to replicate. Facebook’s visibility into user likes and preferences, social connections, and a variety of other social signals and data creates a degree of targeting that is unique both online and offline. Facebook ads are generally targeted, but they are not yet highly social, and marketers are still in the early stages of understanding and implementing successful campaigns. We believeFacebook’s ad platform is just beginning to shift toward more social ads with higher-quality formats, and it will become increasingly valuable to advertisers.

Strong financial profile with growth expected to accelerate in 2H12 and 2013

Over the next few years we expect Facebook to post 30%+ revenue growth and mid-to high-50s (%) EBITDA margins. We estimate 2012 revenue growth will decelerate to 30% and EBITDA margins will compress ~740 bps Y/Y to 54.5%, largely due to the shift toward mobile usage and heavy product and advertising investments. However, we are confident that new ad formats will drive greater monetization and lead to accelerating revenue growth and sequential margin improvement in 2H12 and into 2013. Given high margins and projected capex leverage going forward, we also expect Facebook to be a strong generator of free cash flow.

Facebook (FB)

Overweight

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New ad products change the complexion of Facebook advertising

We believe Facebook’s advertising platform is in the midst of an important transition as formats shift to having greater social context and ads are increasingly placed in the News Feed. Facebook ads have generally been targeted based on a variety of demographic and user preferences data, and Sponsored Stories on the right-hand side of the page have been available since January 2011. But we believe only a minority of ad impressions currently have social context, despite data that suggests ads with social context have 50% better ad recall. Based on our checks with agencies and advertisers we are increasingly bullish on Sponsored Stories both on the desktop and mobile, and we are confident they can deliver meaningfully higher CTRs (click-through rates) and yield higher eCPMs (effective cost per thousand impressions). We are also optimistic on Facebook’s new RTB ad exchange which will: 1) enable third parties to re-target users on Facebook, thereby incorporating purchase intent data; and 2) create greater demand and higher inventory yield through a larger base of advertisers.

Mobile monetization may be better than people realize

The shift toward mobile is widely viewed as a negative for Facebook given limitedscreen real estate and the lack of mobile ad products. Facebook will also likely continue to roll out mobile ads in a measured manner so as not to compromise the user experience. However, we believe Sponsored Stories within the mobile News Feed have become much more prevalent over just the last few weeks and the initial results appear positive. Early data suggests mobile Sponsored Stories have CTRs and eCPMs that are several times those of traditional Facebook desktop ads.Our analysis suggests mobile could become a $300M-$500M quarterly revenue opportunity for Facebook in the next 2-4 quarters as higher pricing and visit frequency offset a lower overall number of impressions. Location-based advertising could also soon be another high value driver of mobile monetization.

Risks to Rating and Price Target

Facebook’s user-first mentality could create short-term risk, volatility

We believe Facebook’s loyal user base is its most valuable asset and the company intends to remain focused on the user experience above all else. This approach should increase the value of Facebook over time, but also has the potential to result in greater risk and volatility on a short-term basis.

Shift in mobile usage well ahead of mobile monetization efforts

The rapid shift of Facebook usage toward mobile has created a significant monetization headwind over the last few quarters. This is likely to continue near term as Facebook is in the very early stages of rolling out mobile ads. The mobile display ad market also remains small—a $1B market in the U.S. this year according to IDC—and marketers are still figuring out how to run effective mobile campaigns. Mobile’s smaller screen real estate and format limitations suggest that desktop ads cannot simply be ported over to mobile—mobile requires a different approach.

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Advertiser ROI on Facebook may remain difficult to measure

Facebook targets the demand generation segment of the purchase funnel and is therefore going after branded advertising spending. However, marketers may still be utilizing Facebook from a direct response approach (demand fulfillment) and they are likely still determining the best way to utilize the Facebook platform across owned, paid, and earned media. GM’s recent comments about Facebook highlight this challenge, and we believe GM is not alone. Our industry discussions suggest strong interest in advertising on Facebook, but ad formats and measurement need to improve and Facebook needs to further educate the ad industry.

Privacy, security, and regulation

As noted above, we believe Facebook’s user base is its most valuable asset.Anything that could compromise that user base from a privacy or security perspective represents a significant risk to Facebook. To some degree all Internet companies have similar risks, but trust is an even more integral piece of the Facebook platform given the depth of user-profile data, social connections, and social signals. In November 2011, Facebook reached a 20-year settlement agreement with the FTC on the practices and treatment of user data and privacy settings, including an independent privacy audit every two years. We also believe Facebook needs to further educate users about privacy settings and make them easier to change.

Dual-class share structure and Mark Zuckerberg control

Facebook has a dual-class share structure—Class A shares have one vote each while Class B shares have 10 votes each. Owners of Class B shares hold ~96% of the voting power post IPO, including Mark Zuckerberg with ~57%. Concentrated voting power is likely to make the company more nimble in a dynamic Internet landscape, but it also leaves institutional shareholders with little say in how the company is run.

Lock-up expirations are both early and staggered, bringing considerable supply

As highlighted in Figure 41 of this report, Facebook’s lock-up expirations run from three months to one year post IPO, with the largest expiration coming at six months. Facebook also plans to sell ~$4B worth of existing stock into the market roughly six months after the IPO (November 2012) to pay a large tax bill related to RSU vesting. Facebook sold ~16% of the company into the public market through the IPO, but increased supply over the next year could lead to greater volatility in the share price.

Company Description

Founded in 2004 and based in Menlo Park, California, Facebook is the largest online global social network and enables its 900M-plus users to connect with friends, family, brands, public figures, and organizations. Users and businesses can share information and photos, form interest groups, and express their lives and identities in many ways. Facebook is a free service for its users, supported by revenues from advertising and payments. Advertisers can engage Facebook’s user base through highly targeted ads and the ability to add social context from user profiles and interactions. Developers can also leverage Facebook’s platform through APIs (application programming interfaces) to personalize and engage in social interactions for new products and partnerships with other businesses.

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Key Questions

Can Advertising Monetization Increase Meaningfully?

One of the primary controversies surrounding Facebook is whether the company can meaningfully increase advertising monetization. While we expect Facebook’s worldwide user growth to remain solid in the coming years—despite currently having over 900M users or 40% of the global online population—we think an increasing proportion of Facebook’s future growth is likely to come from improved monetization or ad revenue per user. We believe user growth and revenue growth are converging in 2012, but we expect ad revenue to reaccelerate in the back half of this year and into 2013, again driving a greater gap between these measures.

We model Facebook’s ad revenue based on: 1) the number of impressions; and 2) pricing on an eCPM basis. Based on the still-early stage of Facebook advertising and near-term macro pressures in Europe we do not model any pricing improvement in 2012. However, going forward we anticipate pricing increases to become a larger relative driver of ad revenue growth. We believe Facebook can significantly improve advertising monetization as evidenced by the reacceleration we model in 2H12 and into 2013, and the relatively stable ~30% ad revenue growth we anticipate over the next few years.

Key ad monetization drivers include: 1) transition of the ad platform toward more social ads and higher-quality formats, especially on the desktop; 2) mobile monetization which is just beginning; 3) continued education of marketers; 4) development of better ROI tools; 5) Facebook’s RTB ad exchange; and 6) location-based advertising.

Social advertising in very early stages. We think social marketing remains in its early stages and there has yet to be the breadth and depth of advertisers required to drive deeper monetization of Facebook’s users—that is part of the opportunity going forward. And even though ads are usually targeted, we believe there are major opportunities to add greater social context to ads, particularly as ads with social context have 50% better ad recall than ads without it according to a Facebook study.

Potential for Facebook to grow revenue per user. In order to better gauge Facebook’s potential revenue opportunity, we compared Facebook’s revenue per user to those of a range of other large online advertising and social networking companies. As shown below in Figure 1, Facebook’s worldwide revenue per user trails those of large U.S. web companies including Google and Yahoo!. Facebook’s revenue per user was roughly 32% below Yahoo!’s last year, but we expect this gap to shrink over time as Facebook improves its advertiser depth and targeting/measurement capabilities.

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Figure 1: Facebook Revenue per User Compared to Other Internet Companies

Source: Company data and J.P. Morgan estimates. Note: Worldwide data.

We model revenue per user to grow from $5.11 in 2011 to $6.27 by 2014, rebounding to double-digit growth after a flattish 2012. We would not expect Facebook to reach Google’s $28/user anytime soon given that search typically targets users close to the bottom of the purchase funnel and advertisers are willing to pay a premium for ads that directly lead to a near-term purchase. We believe it also remains easier to calculate ROI metrics for search compared to social.

We also note that Facebook’s revenue per user trails those of other web companies in spite of having higher engagement or time spent per user. As shown in Figure 2below, Facebook accounted for nearly 14% of online time spent in the U.S. in 2011—more than any other site—though it accounted for just 5% of U.S. online advertising spend. We expect near-term share gains to continue at the expense of portals such as Yahoo!, AOL, and MSN as dollars follow engagement. But we expect Google to continue to take disproportionate share as advertisers are extremely familiar with the measurability and ROI of search.

Figure 2: Facebook’s Share of U.S. Online Advertising Significantly Lags its Share of UsageU.S. Data for 2011

Source: Company data, IAB, comScore, and J.P. Morgan estimates. Google U.S. share includes O&O and Network revenue.

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Significant monetization potential across geographies. Figure 3 below also highlights the significant monetization gap that exists across Facebook’s reported geographies. As early as social advertising is in the U.S., it is at an even earlier stage in international markets. We believe Facebook is generally showing fewer impressions in these markets and CPMs are significantly lower. For example, we project Facebook will have an average eCPM of $0.36 in the U.S and Canada in 2012, but average pricing of only $0.17 in Europe, $0.16 in Asia, and $0.10 in Rest of World. Overall, on an eCPM basis Facebook inventory is currently priced like low-end remnant online inventory, and is therefore well below guaranteed online inventory and virtually all offline media. We believe pricing across all geographies can increase over time as Facebook’s ad platform transitions to more social ads and higher-quality formats.

Figure 3: Facebook Revenue/User by Geography

Source: Company reports and J.P. Morgan estimates.

Measurement of ROI underdeveloped. According to a 2011 Social Marketing Survey, only 13% of marketers said they are “very effective” at measuring results of their social media campaigns. We think this data point suggests the early and experimental nature of Facebook advertising for many advertisers and believe the company needs to continue to roll out new ad formats and metrics to help advertisers and agencies substantiate the efficacy of Facebook ads. We think Facebook is positioned to become a leading brand awareness or demand generation vehicle for advertisers, though our checks suggest that many advertisers on the platform continue to use Facebook mostly as a direct response tool—an approach through which Facebook likely underperforms other ad formats such as search. As a result, we think traditional ROI measurement techniques likely need to be adjusted to include the impact on Fans and Friends of Fans to account for the full viral nature of Facebook’s ad formats and audience.

2010A 2011A 2012E 2013E 2014ERevenue per MAU (ARPU) Summary

US & Canada $8.62 $11.50 $11.86 $13.04 $14.29Europe $3.85 $5.61 $5.68 $6.61 $8.08Asia $1.49 $2.08 $2.57 $2.93 $3.42Rest of World $0.27 $1.56 $1.88 $2.45 $3.19Total $4.08 $5.11 $5.05 $5.55 $6.27

Y/Y Growth

US & Canada 33% 3% 10% 10%

Europe 46% 1% 16% 22%Asia 40% 24% 14% 17%

Rest of World 468% 21% 30% 30%Total 32% 25% -1% 10% 13%

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Figure 4: Effectiveness at Measuring Social Media Campaigns According to U.S. B2C and B2B Marketers% of Total

Source: Chief Marketer, 2011 Social Marketing Survey.

Three near-term monetization drivers. We model an acceleration in revenue growth in 2H12 and into 2013 as we are positive on monetization improvements driven by: 1) greater inclusion of Sponsored Stories in the Desktop News Feed; 2) Sponsored Stories on Mobile; and 3) the Facebook Ad Exchange.

Sponsored Stories in Desktop News Feed. Facebook launched its sponsored stories ad format on the desktop in January 2011, though these ads were originally relegated to the right rail of a Facebook page. The Sponsored Stories ad format allows marketers to amplify the distribution of stories or posts that users have already shared. For example, when a user on Facebook likes Starbucks, Starbucks can then use Sponsored Stories to highlight that to a user’s friends. Sponsored Stories can be created around a number of actions including Likes, RSVPs, check-ins, app usage, and others.

In January 2012, Facebook began including Sponsored Stories in a user’s News Feed on the desktop. We think the inclusion of Sponsored Stories in the News Feed makes the ads much more prominent to the user and should increase their effectiveness. Therefore, we believe advertisers should be willing to pay apremium for this exposure. According to a recent study of 17 clients by TBG Digital—a company that places ads through Facebook’s ads API—Facebook’s Desktop Sponsored Stories in the News Feed have a 6x higher click-through rate than overall desktop ads (News Feed + Sidebar), as shown in Figure 5. In addition, eCPMs on desktop News Feed ads at $3.72 are much higher than those of overall desktop (News Feed + Sidebar) ads at $0.74. We note that Sponsored Stories in the desktop News Feed are almost entirely incrementalgiven that these ads have only been recently rolled out by Facebook in a meaningful way.

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Figure 5: Facebook Sponsored Story Ad Performance

Source: TBG Digital and TechCrunch.

Sponsored Stories on Mobile. As we highlighted earlier, users have been adopting Facebook on mobile at a rapid rate, and even if it has created incremental usage, it has been a net negative to revenue given the lack of monetization on mobile devices. In addition, the lack of screen real estate leaves potentially fewer opportunities to place ads in a mobile Facebook user’s session or visit. Facebook officially began rolling out Sponsored Stories in the Mobile News Feed in March 2012, but our checks with both advertisers and users suggest frequency has increased more materially over just the last few weeks. The challenges of monetizing mobile are well known in terms of lack of screen real estate and perhaps shorter engagement sessions. But we believe Sponsored Stories on Mobile will benefit from being directly in a user’s News Feed, without any of the other potential visual distractions that may exist on the desktop. According to the TBG Digital study mentioned above, Sponsored Stories in the Mobile News Feed click-through rates and eCPMs are both 13x higher than those of overall desktop ads on Facebook and about 2x as high as those of desktop News Feed Sponsored Stories.

Figure 6: Facebook Sponsored Story Ads in Mobile (Left) and Desktop (Right)

Source: Facebook iPhone App and Company website. Note: Used with permission.

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According to comScore, the News Feed/Homepage accounts for ~40% of Facebook user activity in terms of time spent, making it the largest driver of monetization on both desktop and mobile as it is the primary area where brands can communicate with their Fans and Friends of Fans. However, despite the high usage of News Feed, a minority of Fans see content from a brand in a given week.According to Facebook, only 16% of Fans are reached by branded content from a brand that posts content five out of seven days on its Facebook page, as some fans may miss content based on their usage patterns and the volume of content flowing through the News Feed. In addition, Facebook’s algorithm ranks content or stories based on relevance so only a fraction of content/stories are delivered to a user at a specific time. We believe Sponsored Stories can become an extremely effective ad format over time as they blend in with the rest of a user’s stories and the user likely perceives them with similar importance to unpaid stories.

Figure 7: Share of Time Spent on Facebook.com by Activity (%)

Source: comScore Mediabuilder, U.S., March 2012.

Facebook Exchange should improve targeting. Facebook recently announced it would allow advertisers to bid on specific impressions in real time through its Facebook Exchange. Real-time bidding allows advertisers to bid on specific impressions or users rather than inferring user intention through broad demographics (age, gender, etc.) or interests. One of the keys to the Facebook Exchange is the ability for advertisers to use third-party data to target ads on Facebook. For example, if a user visits an online travel agent but leaves before the check-out process, the online travel agent can re-target—site targeting in this case—that user on Facebook with additional messages or offers. Facebook will allow real-time bidding for ads on the right-hand side of a page and therefore the user’s News Feed will not currently include re-targeted ads. In addition, pricing will be based on a CPM basis and initial technology partners will include TellApart Inc., Turn Inc., Triggit, DataXu Inc., MediaMath Inc., AppNexus Inc., The Trade Desk Inc., and AdRoll.com. Exchange partners will now have access to a new, large pool of inventory through Facebook, which should help increase advertiser demand and yield on the Facebook platform.

We believe site re-targeting could significantly improve ad pricing on Facebook. According to AdRoll.com—one of the technology partners mentioned above—CPMs for site targeting can range from $1.00 to $2.50, well above Facebook’s current CPM of ~$0.30 in the U.S. According to DataXu, pricing for re-targeting campaigns is 3x higher (see Figure 8) than a run of exchange (broad buy across an exchange’s inventory) as multiple DSPs (demand-side platforms) and ad

Homepage/ Newsfeed, 40%

Photos, 18%

Apps/Tools, 14%

Profile Pages, 12%

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networks bid on a limited number of high-value impressions. We think Facebook’s ~70% reach in the U.S. and high engagement—14% of all minutes online—make it well suited for advertisers to re-target users on Facebook. In addition to the expected pricing benefits from the Facebook Exchange, we think more relevant ads should also improve the user experience.

Figure 8: Prices for Re-Targeted Ads on Ad Exchanges Up to 3x Those of Non-Targeted Ads%

Source: DataXu, MarketPulse, September 2010.

How Is Mobile Impacting FB Users and Revenue?

Facebook has witnessed significant growth in mobile usage as a result of rapid smartphone and tablet adoption. We think mobile is driving higher usage of Facebook overall as DAUs as a percentage of MAUs—a measurement of overall engagement—has increased to 58.4% in 1Q12 from 54.7% a year ago.

Mobile transition has been a net negative to Facebook’s revenue over the last few quarters and Facebook will likely continue to take a very reserved approach to displaying ads in Mobile to test the impact to the user experience. As Mobile will likely have fewer ads per session than desktop, even though Mobile is driving incremental usage of Facebook overall, it may be cannibalistic to revenue in the nearterm depending on how quickly mobile usage replaces desktop usage on Facebook.

However, as noted above, we think Mobile ads—specifically Sponsored Stories in the Mobile News Feed—can have significantly higher click-through rates and eCPMs, which should help offset the smaller number of overall ad impressions. Furthermore, we think Facebook has begun rolling out Mobile Sponsored Stories more in June and we forecast an inflection in Mobile and overall revenue in 2H12.

As shown in Figure 9 below, Facebook’s overall audience increased by 56M monthly users in 1Q12 (+7% Q/Q), though web-only users were flat Q/Q. Mobile-only users increased 25M and Web and Mobile users increased 31M.

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Figure 9: Facebook Users by MediumUsers in millions

Source: Company reports.

While Facebook’s 83M mobile-only users generated close to no revenue in 1Q12, it’s unclear how usage of Web and Mobile (405M) users is split between the two platforms. According to comScore, mobile users on average spend 441 minutes/user/month on Facebook’s mobile apps/mobile site compared to 391 minutes/user/month on the PC. This suggests mobile could account for ~30-40% of all time spent on Facebook—activity that’s almost completely unmonetized today, but increasingly will be going forward.

Figure 10: Facebook’s Mobile Users Are More Engaged Than its Web UsersMinutes per User

Source: comScore, US data.

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We think evidence suggests that mobile is slowing web usage growth and perhaps even cannibalizing web usage or engagement. As we mentioned earlier, increasing DAUs as a percentage of MAUs suggests overall engagement on Facebook (Web and Mobile) is increasing. However, as Figure 11 below suggests, growth in web/PC engagement—measured in visits per unique visitor—has slowed significantly in the last 2-3 quarters. We think mobile is the primary driver of this shift in user behavior. We believe mobile is likely to remain a net negative in the very near term as users migrate from desktop to mobile faster than ads materialize, but mobile monetization will begin to kick in over the next few quarters and mobile creates a compelling long-term opportunity for Facebook.

Figure 11: Facebook’s Web Activity Growth Across Unique Visitors and Average Visits per VisitorY/Y Growth

Source: comScore, US data. Web/PC use only.

How Much Ad Revenue Could Mobile Generate?

Estimating Facebook’s mobile ad revenue potential is difficult, but it is also a critical question for many investors. As noted above, despite the potential negative revenue impact of Facebook’s usage shift toward mobile, we are optimistic about Facebook’s ability to monetize its mobile platform based on strong engagement, a captive audience focused on the News Feed, and mobile ads that may potentially have higher click-through rates and eCPMs than desktop ads.

As shown in Figure 12 below, we model several scenarios for Facebook’s mobile monetization as the company slowly rolls out Sponsored Stories in the Mobile News Feed and experiments with additional mobile ad formats. The range of potential mobile revenue outcomes is wide based on estimates for impressions per mobile visit, visits per user, and pricing. Based on our analysis, we believe mobile could become a $300M-$500M quarterly revenue opportunity for Facebook within the next 2-4 quarters.

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Figure 12: Facebook Quarterly Mobile Ad Revenue Potential Based on 1Q12 User Metrics


For our analysis, we looked at web monetization and found that Facebook’s 818M web users in 1Q12 generated $872M in ad revenue—$0.36 per user per month. Our estimates suggest web users were exposed to 58 impressions per visit at an eCPM of $0.19.

By contrast, Facebook has 488M (and growing) mobile users and we think mobile users are likely to use or visit Facebook’s mobile apps more frequently. We estimate a range of 0.5-4.5 times per day, or 15-135 visits per month.

We think the number of ad impressions that can be delivered in a mobile visit (0.5-2) is a fraction of web impressions per visit (58). However, we think mobile eCPMs are likely to be significantly higher as mobile Sponsored Stories have social context, are only in the News Feed, and face less competition from other Facebook content on the screen. Our analysis uses a mobile eCPM range of $1-$9.

Pricing is critical, but impressions per visit and visits per user are the other key variables. Based on Facebook’s focus on the user experience, we would not expect ad impressions per mobile visit to go above 2, and that is likely high early on. In Figure 13 below we look at several scenarios to determine whether a mobile user could generate more ad revenue per user than a web user.

Our breakeven point for web revenue per user is $0.36/user/month based on 32 visits/month, 58 impressions/visit, and an eCPM of $0.19. Hence, the shaded segments in the left-hand tables indicate the scenarios under which Facebook can be revenue neutral on a per-user basis assuming all of their activity shifted to mobile. Our views on mobile pricing and frequency of visits give us confidence in Facebook’s ability to reaccelerate advertising growth. Facebook’s desktop ads should also see improving monetization through Sponsored Stories in the News Feed and Reach Generator.

Webin millions Scenario 1 Scenario 2 Scenario 3 Scenario 4

Users 818 488 488 488 488

Qtrly Ad Impressions (in billions) 4,600 32.9 - 76.9 65.9 - 153.7 98.8 - 230.6 131.8 - 307.4Visits/User/Month 32.1 45 - 105 45 - 105 45 - 105 45 - 105Impressions/Visit 58 0.5 1.0 1.5 2.0eCPM $0.19 $3 - $7 $3 - $7 $3 - $7 $3 - $7Qtrly Ad Revenue $872 $99 - $538 $198 - $1,076 $296 - $1,614 $395 - $2,152Revenue/User/Month $0.36 $0.07 - $0.37 $0.14 - $0.74 $0.20 - $1.10 $0.27 - $1.47

Mobile

16



Figure 13: Facebook’s Web to Mobile User Migration Revenue Breakeven Scenarios$s

Source: J.P. Morgan estimates.

Can Facebook Deliver Meaningful ROI for Advertisers?

We think there has been some degree of controversy around the efficacy of advertising on Facebook, particularly since General Motors announced last month that it would no longer spend on paid ads on Facebook—preferring to invest in unpaid content on GM’s Facebook page. With Facebook users totaling over 900M, we think it’s difficult for an advertiser to ignore Facebook and we note that all of the Ad Age 100 advertisers spend on Facebook advertising. Our discussions with advertisers suggest strong interest in advertising on Facebook, though ad formats and measurement still likely need to evolve for advertisers to spend on Facebook in a meaningful way. According to a recent study by Ipsos, 20% of Facebook users purchased products because of ads or comments they saw on Facebook (Figure 14), suggesting significant potential for advertisers to implement effective marketing strategies. We think the onus remains on Facebook to continue to create new methods for advertisers to measure ROI in order to meaningfully increase advertising on the site.

Mobile Revenue/User/Month Quarterly Mobile Ad Revenue (in $Ms)

Impressions Per Mobile Visit --> 0.5 Impressions Per Mobile Visit --> 0.5

15 45 75 105 135 15 45 75 105 135

(0.5/day) (1.5/day) (2.5/day) (3.5/day) (4.5/day) (0.5/day) (1.5/day) (2.5/day) (3.5/day) (4.5/day)

$1.00 $0.01 $0.02 $0.04 $0.05 $0.07 $1.00 $11 $33 $55 $77 $99

$3.00 $0.02 $0.07 $0.11 $0.16 $0.20 $3.00 $33 $99 $165 $231 $296$5.00 $0.04 $0.11 $0.19 $0.26 $0.34 $5.00 $55 $165 $275 $384 $494$7.00 $0.05 $0.16 $0.26 $0.37 $0.47 $7.00 $77 $231 $384 $538 $692

$9.00 $0.07 $0.20 $0.34 $0.47 $0.61 $9.00 $99 $296 $494 $692 $889

Impressions Per Mobile Visit --> 1 Impressions Per Mobile Visit --> 1

15 45 75 105 135 15 45 75 105 135


$1.00 $0.02 $0.05 $0.08 $0.11 $0.14 $1.00 $22 $66 $110 $154 $198

$3.00 $0.05 $0.14 $0.23 $0.32 $0.41 $3.00 $66 $198 $329 $461 $593$5.00 $0.08 $0.23 $0.38 $0.53 $0.68 $5.00 $110 $329 $549 $769 $988$7.00 $0.11 $0.32 $0.53 $0.74 $0.95 $7.00 $154 $461 $769 $1,076 $1,383

$9.00 $0.14 $0.41 $0.68 $0.95 $1.22 $9.00 $198 $593 $988 $1,383 $1,779

Impressions Per Mobile Visit --> 1.5 Impressions Per Mobile Visit --> 1.5

15 45 75 105 135 15 45 75 105 135


$1.00 $0.02 $0.07 $0.11 $0.16 $0.20 $1.00 $33 $99 $165 $231 $296

$3.00 $0.07 $0.20 $0.34 $0.47 $0.61 $3.00 $99 $296 $494 $692 $889$5.00 $0.11 $0.34 $0.56 $0.79 $1.01 $5.00 $165 $494 $824 $1,153 $1,482$7.00 $0.16 $0.47 $0.79 $1.10 $1.42 $7.00 $231 $692 $1,153 $1,614 $2,075

$9.00 $0.20 $0.61 $1.01 $1.42 $1.82 $9.00 $296 $889 $1,482 $2,075 $2,668

Impressions Per Mobile Visit --> 2 Impressions Per Mobile Visit --> 2

15 45 75 105 135 15 45 75 105 135


$1.00 $0.03 $0.09 $0.15 $0.21 $0.27 $1.00 $44 $132 $220 $307 $395

$3.00 $0.09 $0.27 $0.45 $0.63 $0.81 $3.00 $132 $395 $659 $922 $1,186$5.00 $0.15 $0.45 $0.75 $1.05 $1.35 $5.00 $220 $659 $1,098 $1,537 $1,976$7.00 $0.21 $0.63 $1.05 $1.47 $1.89 $7.00 $307 $922 $1,537 $2,152 $2,767

$9.00 $0.27 $0.81 $1.35 $1.89 $2.43 $9.00 $395 $1,186 $1,976 $2,767 $3,558

Visits/User/Month

eCPM

Visits/User/Month

Visits/User/Month

Visits/User/Month

Visits/User/Month

eCPM

eCPM

eCPM eCPM

Visits/User/Month

eCPM

Visits/User/Month

eCPM

Visits/User/Month

eCPM

17



Figure 14: Facebook Drives a Significant Amount of Purchasing DecisionsU.S. Facebook Users Who Have Bought Products Because of Ads or Comments They Saw on Facebook, by

Age, June 2012

Source: Reuters survey conducted by Ipsos, June 2012.

Many brands use Facebook paid ads to drive Likes to the brand’s Facebook page and these campaigns are often measured on a cost-per-like basis. Once a Facebook user likes a brand (i.e., becomes a Fan), the brand creates a direct line of communication with the user—almost akin to an email marketing list. However, we think the marketing value of these Fans to a brand goes well beyond direct Fans to Friends of Fans as well, since each Fan (of a top 100 brand) has nearly 34 friends (percomScore) to which he/she can advocate the brand. As shown in Figure 15,Kenshoo Social reported that over 77% of people clicking on Sponsored Story ads promoting brand page Likes convert to fans, exhibiting the value of social context in ads.

Figure 15: Conversion Rates for Clicks in Sponsored Stories

Source: Kenshoo Social and J.P. Morgan estimates.

20%

12%

17%

28%

80%

88%

83%

72%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Total

55+

35-54

18-34

Yes No

0.2%

60.4%

77.3%

15.7%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

App Share App Used Like Post Like

Conversion Rates

18



A recent study by comScore commissioned by Facebook sheds some light on the effectiveness of Facebook’s paid ads. The study analyzed the lift to online and in-store purchasing behavior for users exposed to Facebook ads of a major retailer. The results showed a 16% lift in in-store purchases (1.47% of users exposed to Facebook ads, up from 1.27%) for users exposed to Facebook ads. In addition, Facebook ads yielded a 56% increase in online purchases for the retailer from exposed customers vs. customers that had not been exposed to Facebook ads.

Figure 16: Facebook Ads Drove a Significant Lift in Purchases for a Major Multichannel Retailer% of Exposed Group Purchasing Online and In-Store in the Weeks Following Facebook Ad Exposure

Source: comScore and Facebook.

We also think that Facebook is in the early stages of ad monetization. We believe marketers realize meaningful value in maintaining a brand presence via an unpaid Facebook page. Over time, in our view Facebook could add additional paid tools for brands to improve their Facebook pages or presence which could drive significant monetization improvements. We think Sponsored Stories—which allows brands to amplify their communications to Facebook Fans—is likely the first step in many toward driving higher revenue from Facebook marketers.

Can Payments Evolve Beyond Gaming?

Social gaming represents the largest portion of Facebook’s Payments business and we think Zynga still drives the majority of Facebook’s Payments revenue—64% of Facebook Payments/Fees revenue in 1Q12. While the network and distribution effects of Facebook integration are clear in our view, we think Facebook is taking a cautious approach toward monetization and as a result Payments today are almost exclusively generated through in-app purchases in social games.

As it did with games, Facebook in our opinion can continue to leverage network effects to drive in-app purchases in social media discovery beyond the games vertical to music, news, and online video. However, we believe the underlying economics in digital music, online news, and video are not likely to be as rich as those for games, and we see Facebook taking a smaller percentage of these transactions though we think volumes could be significantly higher than those with games.

0.19%

0.38%

0.49%0.61%

0.11% 0.20%0.32%

0.39%

0.46%

0.84%

1.18%

1.47%

0.37%

0.69%

1.00%

1.27%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

Week 1 Week 1-2 Week 1-3 Week 1-4

Online-Test Online-Control In-Store-Test In-Store-Control

19



Music. We think deep Facebook integration has been instrumental in Spotify’s growth from 3M MAUs in September 2011 (pre-integration) to 22M MAUs in June, according to AppData. The Spotify integration allows users to sign into Spotify’s service using their Facebook account so that a user’s Facebook Friends can view and share playlists.

News. While Facebook currently features “Trending Stories” in the News Feed of popular stories read by users, we think there could be a way for Facebook to monetize news for paid online articles or within paid reading apps.

Online Video. We think the distribution and marketing effects of this kind of integration are powerful and we see similar opportunities for deep integration with online video services such as Netflix in the intermediate term.

We believe there is also potential for Facebook to expand its Payments beyond in-app purchases. Not only is Facebook expanding its own products with the App Center and paid apps, but many partner sites and developers currently leverage the Facebook social graph through Open Graph at no cost. In the intermediate to long term, we think Facebook may be able to monetize such Payment platform products.

App Center. We note the company’s recent App Center launch which enables social discovery of new apps, some of which may be paid and therefore potentially monetizable for Facebook.

Open Graph. We think the volume of traffic that Facebook brings to app developers is significant and we remain positive that the company can find new monetization methods and effectively become the “toll-taker” of user purchasing activity on Facebook and third-party sites leveraging Facebook’s Social Graph.

Other, such as Connected TV. We believe there may be other areas in which Facebook’s social layer can add value which could be monetized as well. We think one such idea could be the potential for Facebook to be the social layer for Connected TVs so that users can share and recommend TV content directly to their social network without having to use a separate device. Facebook data and targeting capability could also serve as the basis for ad delivery in an IP-enabled ad environment.

20



Figure 17: Snapshot of Facebook App Center

Source: Facebook. Note: Used with permission.

Will Facebook Get Into Search?

We believe competition between Google and Facebook is likely to increase over the next several years as each company vies to become both the starting point and primary toll-taker on the web. Google has social products such as Google+, Google +1, and Google Search Plus Your World in order to improve its search tools using social signals. While it is still early, we think Facebook has a significant lead in social through strong user metrics and engagement that do not appear to be decreasing.

According to comScore, Facebook generates a large amount of searches—roughly2B or 1% worldwide share—though we think the vast majority of these searches are likely to be non-commercial or people searches. As witnessed during the Google/MySpace deal from 2007, monetization of search inventory on social networks is challenging, in our view, and as a result we don’t think Facebook is likely to launch its own search engine anytime soon. However, we believe Facebook will increasingly leverage its users’ social signals (Likes, Shares, etc.) to bolster a competitive search service—most likely being Microsoft’s Bing. Just as Google applies its Page Rank algorithm to rank a website’s relevance based on the number of other websites linking into it, we think Bing is integrating Facebook’s social signals to rank its search results and provide a differentiated search experience.

21



Figure 18: Snapshot of Facebook Bing Integration

Source: Bing.com. Note: Used with permission.

In May, Bing announced it began including Likes and recommendations from Facebook friends and strangers into its search results. In addition, Bing also announced the roll-out of a social sidebar which allows Bing search users to solicit help from their Facebook friends while performing a search. For example, a search for “hotels in Chicago” would feature a user’s Facebook friends living in Chicago as well as the ability to request help finding a hotel from a user’s Facebook friends.

We do not believe Facebook has closed the door on one day becoming a principal in search. However, we do not view it as a near-term priority and we believe it would have to provide a differentiated experience in a social setting without negatively impacting the user. In the meantime we believe Facebook is rightly focused on user growth and monetization of its core social network. Building a robust search engine would require significant engineering and capex resources that could prove a distraction for management.

We also think that Facebook currently offers a discovery mechanism, though it is a “push” model rather than Google’s “pull” model, in which the user requests or pulls the information of interest. Hence, creating a search service could potentially cannibalize existing usage of Facebook by frequently redirecting users outside the Facebook network. Of course Facebook is already a material driver of traffic for sites all across the Web. We see the relationship with Bing continuing to grow stronger as the two companies face Google as a large competitor. As mentioned previously, we think Facebook’s query volume is primarily related to people searches and therefore typically difficult to monetize.

We think Facebook is unlikely to implement a similar search integration with Google, and given the differentiation it provides, Microsoft (MSFT, $30.02, rated Neutral by J.P. Morgan Software analyst John DiFucci) may be willing to ultimately compensate Facebook for exclusivity, in our view.

22



Will Facebook Build an Ad Network?

As comparisons to Google are common, we think many have concluded that a Facebook ad network is the next logical step in the company’s progression, particularly given that Facebook is the social layer underlying many different websites across the web and therefore following the same user from Facebook across other sites could drive greater reach and ad performance. In recent weeks Facebook has seemingly taken two key steps toward the direction of an ad network through the launch of its RTB Ad Exchange and serving ads on Zynga.com. However, we still think a Facebook ad network is unlikely in the near term for a few reasons:

Facebook is better served driving O&O sales. As we’ve frequently discussed in this report, it is early in social advertising. We believe Facebook needs to prove out efficacy and returns more on its core platform before it can more broadly deliver ads on third-party sites. We note that Google was able to quickly deploy its existing search and ad technology to build out a contextual ad network,but we believe Google’s text-based ads were perhaps more extensible early on to third-party sites than Facebook’s social ads may be. We think Facebook is likely to focus in the near term on improving its O&O (Owned & Operated) ad platform on which it does not share revenue with publisher partners. We believe the recent Facebook Exchange announcement is a significant positive for improvingmonetization by leveraging third-party data and advertiser demand, but we note that it remains limited to Facebook’s O&O inventory.

Facebook is still in the process of refining its own ad technology. We think the Facebook ad platform remains nascent and advertisers have yet to fully embrace Facebook’s ad formats in a meaningful way, as concerns about measurability and ROI remain. We believe Facebook would be better served getting this right on its own platform before extending it to other sites.

Facebook already has significant reach. One of the primary reasons advertisers employ ad networks is to increase their reach by advertising across multiple websites across the web. We think Facebook already offers advertisers significant reach in most geographies—over 70% of U.S. Internet users—and significant engagement offers several opportunities for advertisers to target users exclusively on Facebook.com rather than targeting Facebook users on third-party sites.

Privacy issues. We also think Facebook is likely to tread carefully when it comes to targeting its users on third-party websites. The recent RTB/re-targeting announcement enables exchange partners to use third-party site data to target users on Facebook.com, but it does not include ad targeting of Facebook.com users on a third-party website.

Ad ROI. We think social ads work well in a social environment—like Facebook.com—but it’s unclear whether users will find social ads valuable in a third-party setting and it could raise user concerns around privacy.

23



Social Infrastructure Creates Options

We believe Facebook has become the underlying social fabric of the Internet and we think this utility gives the company and investors significant option value in terms of launching new businesses in the future. We think the Internet ecosystem is settling around a few select companies that will provide the base or foundation of application development over the next several years. We believe Amazon, Apple, Google, Facebook, and eBay are emerging as primary platforms on top of which large amounts of online/mobile communications, advertising, and commerce are likely to be conducted over the next decade. We use five key attributes to define and evaluate the competitiveness of a platform and we believe Facebook ranks highly in each of these key attributes:

Global reach. A platform’s underlying technology and network is easily scalable across geographies. Facebook and Google are likely the best examples of this given their strong brands and widespread adoption among users and developers across the world.

Large ecosystem. Platforms have strong relationships with developers/partners that build their businesses or applications on top of the underlying platform architecture. Apple (AAPL, $572.03, rated OW by J.P. Morgan IT Hardware analyst Mark Moskowitz) has created a robust applications ecosystem through iOS and its iTunes store, and as a result has become the primary distribution focus for developers.

Device agnosticism. Android is probably the best example as it is an open-source operating system that runs on many mobile devices—in sharp contrast to Apple’s iOS. Facebook is also accessible across most devices and operating systems though the company has deeper integration with Microsoft and Apple, partially due to competition from Google.

Network effects. Leading platforms have robust network effects such that each additional user of the platform enhances the value of the platform to existing users. The best example of this in our view is Facebook, though we believe Apple’s AppStore also has strong network effects.

Toll booths. Platforms typically generate revenue from transactions or activity that occurs through applications that reside on them. Examples are Facebook Credits, Google AdWords/AdSense, and the Apple App Store.

24



Figure 19: Large Web Platforms and Their Ecosystems

Source: J.P. Morgan.

While we expect advertising to remain the primary driver of Facebook’s revenue for the next several years, we think Facebook’s strong social platform lends itself to many future monetization opportunities:

New ad formats. We’ve talked about how Facebook ads are in transition toward becoming more social in context and higher quality. Accordingly, we think formats will continue to evolve across the desktop right rail, the desktop News Feed, and mobile. We believe location-based targeting is likely in the near term, especially on mobile devices. We believe this could be a significant opportunity to drive Facebook advertising among local merchants. Over 4M small businesses now have a Facebook page.

Adding premium tools to brand pages. We think many brands are increasingly relying on their Facebook Fan or brand pages to communicate with users and drive word-of-mouth marketing. We think this is apparent in the fact that in TV ads many large CPG brands now direct consumers to visit their Facebook page rather than their own website. Facebook is well positioned to monetize this trend,in our view, by offering brands premium tools to manage and distribute content from their Fan pages, and we think the recent roll-out of Sponsored Stories in the News Feed is an example of brands paying Facebook to amplify their stories.

Monetizing the social graph. We think several companies including Spotify, TripAdvisor, and Zynga have witnessed sizable user growth through deep Facebook integrations and in our opinion Facebook may increasingly monetize its social utility by requiring companies with deep Facebook integrations to pay a fixed licensing or per-user/subscriber fee. As detailed later in this report, we think digital music, online video, and news are likely to be the first of many new categories monetized by Facebook.

Facebook

Google

Apple

Amazon

Utility apps such as Birthday Cards

& Horoscopes

Business/Nonprofitapps such as Causes

Communication tools such as WindowsLive Messenger

eCommerce sites Android

iTunes

iOS Operating System

Apple App Store

Amazon Web Services

Kindle

Content sites such as NY Times

AdWords/AdSense

Social Games

Third Party Marketplace

Fulfillment byAmazon

eBayeCommerce Marketplace

Channel Advisor,Mercent

PaypalConsumers/ Merchants

Third party Paypal apps

25



Online identity. While several large technology companies including Microsoft, Google, and Yahoo! have attempted to create single-sign-on access across multiple sites on the web, we think Facebook is the first company to truly crack the problem of a single online identity. We think Facebook could extend this concept with deeper verification and by convincing users to add credit card or other payment information which in turn would enable users to easily and safely transact and/or add/consume content across the web. Over time we expect Facebook to add additional micro transaction features, enabling bloggers, developers, and large news media outlets to easily charge users for online transactions—with Facebook collecting an incentive-based fee for logins or purchases on a site. In addition, we think the social signals and engagement of Facebook users on third-party sites create a richer experience for users on Facebook.com.

Social commerce. We refer to social commerce as eCommerce conducted through a social networking site such as Facebook. As consumers become more comfortable trusting Facebook with their personal information—including credit card and payment data—we think they could be more likely to conduct a transaction on an online retailer’s Facebook app. In many instances, shopping in the physical world can be a social experience and we think Facebook can facilitate similar experiences online. For example, a user can have his/her Facebook friends select a shirt that matches a pair of pants selected on a Facebook merchant’s website.

According to a Booz & Company study, social commerce is expected to drive $9B in sales of physical goods in 2012, reaching $30B by 2015, with the U.S.growing faster than the rest of the world. Several companies, both large and small, have begun to leverage social networks to drive eCommerce transactions. For example, 1-800-Flowers has built its eCommerce platform directly into its Facebook Fan page, allowing users to complete transactions directly on Facebook.com. The company also leverages Facebook birthday and calendar features to drive higher engagement when consumers are in the market for its products. We think Facebook also has the opportunity to create its own marketplace for secondary goods or partner with companies such as eBay and Craigslist to allow users to sell used items to their Facebook Friends or other users in their neighborhood.

Figure 20: Social Commerce Revenues Worldwide, U.S. vs. Rest of World, 2011-15

$ in billions

Source: Booz & Company, Turning ‘Like’ to ’Buy’: Social Media Emerges as a Commerce Channel, January 19, 2011.

$1 $3 $5 $9

$14 $4

$6 $8

$12

$16

$5 $9

$14

$20

$30

$0

$5

$10

$15

$20

$25

$30

$35

2011 2012 2013 2014 2015

US Rest of world

26



In addition, a 4Q11 survey of North American Internet users commissioned by Oracle suggests 19% of respondents indicated they had already purchased a product through a retailer’s Facebook page or that they were willing to do so—suggesting both eCommerce players and Facebook need to improve the social shopping experience in order to make social commerce a compelling proposition for users.

Figure 21: Internet Users in North America Who Have Purchased Products via a Retailer’s Facebook Page, Q4 2011% of Total

Source: Oracle, Cross-Channel Commerce 2011: The Consumer View, November 2011.

Payments: Moving beyond gaming. We believe social gaming represents the largest portion of Facebook’s Payments business and we think Zynga still drives the majority of Facebook’s Payments revenue—63% of Facebook Payments/Fees revenue in 1Q12. As it did with games, Facebook in our view can continue to leverage network effects to drive social media discovery beyond games to music, news, online video, connected TV, apps, and eBooks. For example, we think deep Facebook integration has been instrumental in Spotify’s growth from 3M MAUs globally in September 2011 (pre-integration) to 22M MAUs in June 2012, according to AppData. The Spotify integration allows users to sign into Spotify’s music service using their Facebook account so that a user’s Facebook Friends can view and join in to listening to a song with a user. We think the distribution and marketing effects of this kind of integration are powerful and see similar opportunities for deep integration with online video services such as Netflix in the intermediate term.

Have purchased products, 9%

Would purchase products, 10%

Didn't know that I could do this on Facebook, 15%Would never

purchase products, 34%

Do not use Facebook , 32%

27



Large Global Market Opportunity

Global User Growth

Of the current global population of ~7 billion people, IDC forecasts the number of Internet users globally to grow from ~2 billion in 2010 to ~2.7 billion in 2015. We expect Internet penetration to continue to grow, driven by the rapid adoption of connected mobile devices, particularly in emerging markets. Facebook currently has over 901M global users and aims to connect all Internet users through its desktop and mobile offerings.

Figure 22: Facebook Penetration Rates by RegionIn millions

Source: ITU, InternetWorldStats.com, BI, Company reports, and J.P. Morgan estimates.

With nearly 80% of its users accessing Facebook internationally, there is still a lot of headroom for user growth, particularly in large, underpenetrated markets. Penetration rates in the U.S. and U.K. are estimated to be over 60%, in Chile, Turkey, and Venezuela over 85%, in Brazil and Germany around 30%-40%, and in Japan, Russia,and South Korea 20% or lower. Though some of these countries have local social networks with dominant share, Facebook’s global scale offers a unique offering that social networks focused on single markets can not provide. The one exception is China, a market that Facebook is currently not present in and may not be able to enter for the foreseeable future due to regulatory issues outside of the company’s control. Other U.S. Internet companies including Google face similar issues in China.

US & Canada 2009 2010 2011

Population 341 344 348Internet Users 249 262 273

Facebook Users 112 154 179FB Pentration (%) 45% 59% 66%

Europe 2009 2010 2011

Population 614 615 623Internet Users 387 412 461


Asia Pacific 2009 2010 2011

Population 3,839 3,889 3,919Internet Users 741 875 1,066


Rest of World 2009 2010 2011

Population 1,980 1,996 2,043Internet Users 425 422 467


28



Figure 23: Facebook Monthly Average Users (MAUs) and Daily Average Users (DAUs)

In millions


Advertising Market

According to IDC, the total worldwide advertising market is estimated to have been$588 billion in 2010, of which online advertising excluding mobile accounted for $68 billion or 12% of total advertising. IDC projects online advertising to grow to $120 billion or 16% penetration by 2015. We think Facebook’s market opportunity in the advertising market extends beyond the online display ad market, as it has the potential to attract branded ad budgets from offline channels and mobile advertising. Facebook offers advertising solutions that can be targeted to a higher degree than those other traditional offline and online advertising companies. We believe Facebook’s social context, coupled with a highly engaged audience, should enable it to take significant share of online and offline advertising dollars.

Figure 24: Global Advertising Revenues, 2010

Source: IDC, Company reports, and J.P. Morgan estimates.

Figure 25: Global Advertising Revenues, 2015E

Source: IDC, Company reports, and J.P. Morgan estimates.

MAU DAU

2010A 2011A 2012E 2013E 2014E 2010A 2011A 2012E 2013E 2014E

US & Canada 154 179 206 231 255 US & Canada 99 126 149 171 191

Europe 183 229 266 298 327 Europe 107 143 180 216 251

Asia 138 212 290 366 442 Asia 64 105 153 209 263

Rest of World 133 225 306 386 465 Rest of World 57 109 164 232 297

Total 608 845 1,068 1,280 1,488 Total 327 483 646 828 1,002

Y/Y Growth Y/Y Growth

US & Canada 38% 16% 15% 12% 11% US & Canada 64% 70% 72% 74% 75%

Europe 56% 25% 16% 12% 10% Europe 58% 62% 68% 73% 77%

Asia 123% 54% 37% 26% 21% Asia 46% 50% 53% 57% 59%

Rest of World 93% 69% 36% 26% 21% Rest of World 43% 48% 53% 60% 64%

Total 69% 39% 26% 20% 16% Total 54% 57% 60% 65% 67%

Offline Advertising

88.5%

Google3.7%

Facebook0.3%

Other Online Advertising

7.5%

2010$588B

Offline Advertising

84.4%

Google7.1%

Facebook1.5%

Other Online Advertising

7.0%

2015E$770B

29



In the online marketing funnel, we view Facebook as an effective demand generator. Facebook helps advertisers market their brands or products to a wide audience to help users discover and create demand for new products and brands, as compared to demand fulfillment services such as Google search in which the user actively seeks a brand or item. Facebook’s reach and scale with its database of social interactions make it an attractive platform for brand advertisers that previously relied on offline marketing channels for widespread brand exposure. IDC estimates that TV, print, and radio accounted for $363 million, or 62% of the total ad market, in 2010. We believe Facebook can help to attract a growing portion of the offline demand generation ad market as it provides a highly effective platform for brand and product discovery through online word-of-mouth marketing. According to Facebook, an advertiser could reach an audience of 65 million-plus U.S. users in December 2011. As a result, all of the top 100 largest global ad spenders ranked by Advertising Age in 2011 have been reported to advertise on Facebook.

IDC estimates the worldwide mobile advertising market to grow from $2.9 billion in 2010 to $17.4 billion in 2015, equivalent to a 44% CAGR. Facebook’s mobile users have been growing at a rapid pace, reaching 488M MAUs as of 1Q12, and outpacing Facebook’s advertising revenue growth. According to Nielsen, the Facebook mobile app had more UVs (unique visitors) on Android and iPhone in the U.S. in 2011 than any other mobile app, highlighting the network effect through the mobile platform. Though 10.1% of U.S. adult time spent was on mobile devices, eMarketer estimates mobile ad spending share was only 0.9% in 2011. We believe a growing interest in mobile advertising from brand advertisers coupled with improving mobile ad formats suited for smaller screen sizes should help to bridge this disconnect between mobile time spent and mobile marketing spend.

Figure 26: Worldwide Mobile Ad Spend, 2010

Source: IDC and J.P. Morgan estimates.

Figure 27: Worldwide Mobile Ad Spend, 2015E

Source: IDC and J.P. Morgan estimates.

U.S. Search Ads17%

U.S. Display Ads14%

International69%

2010$2.9B

U.S. Search Ads45%

U.S. Display Ads16%

International39%

2015E$17.4B

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Payments

According to NPD, global virtual and digital goods sales online were estimated to be $9 billion in 2011 and are forecast to reach $14 billion by 2016. Facebook generates Payments revenues through fees charged to platform developers, with a majority of its fees generated from virtual and digital goods sold through social games on its platform, with Zynga as its largest partner. We believe Facebook has the opportunity to expand its payments integration in the future beyond the games category into other verticals or types of paid apps, such as music, news, or movies. Beyond in-app purchases, Facebook could also expand its Payments platform to monetize its Open Graph partnerships or paid apps through the App Center. We recognize there may also be potential to enter the global eCommerce market of ~$821 billion by enabling social commerce, but we currently do not expect that to be a near-term focus for the company.

Figure 28: Virtual and Digital Goods Market, 2011

Source: NPD, Company reports, and J.P. Morgan estimates.

Figure 29: Virtual and Digital Goods Market, 2016E

Source: NPD, Company reports, and J.P. Morgan estimates.

Virtual and Digital Goods

94%

Facebook6%

2011$9B

Virtual and Digital Goods

77%

Facebook23%

2016E$14B

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Culture and Management

Emphasis on users

Facebook’s primary focus is to pursue its social mission of connecting users and strengthening relationships through its platform. We believe Facebook’s emphasis on the user experience is central to how the business will be managed, as its success is highly correlated with user and engagement growth. This is evidenced by the company’s reluctance to over-monetize its interface with larger and richer ads, despite the capability to do so. As such, we do not believe the company will engage in any strategy or launch any product that will hinder the user experience in any way,regardless of potential near-term financial benefits. While this may limit Facebook’s near-term financial opportunities, we believe the company’s value is highly correlated with user engagement and loyalty, and view the culture of valuing the user experience to be critical to the long-term growth of the platform.

The Hacker Way

Facebook has adopted the term “hacker” and embraced it as one of its core values. The Hacker Way refers to the approach of constantly building and innovating on its products and services. Mantras such as “Move fast and break things” reinforce the company’s focus and pressure to keep innovating its product, technology, and services. We believe this type of innovative and fast-moving culture is an asset to the company’s structure, given the fickle and trend-driven nature of the Internet and social networking sector. New sites such as Pinterest and Instagram have gained mass adoption at a rapid pace, resulting in Facebook’s acquisition of Instagram ahead of its IPO. We believe Facebook’s culture of constant innovation and shipping products quickly is essential to maintaining its leadership position in the highly competitive social networking and Internet space.

Technology driven

Facebook is a technology-driven company, as it relies on engineers to support and continue to build its platform. To support the website, Facebook invests in data centers, some of which are still capital leased and being converted to owned and operated through capital investments. Data centers are a critical asset to keeping the desktop and mobile sites operational, enabling better control by converting them to all O&O. We expect Facebook to continue to invest in data centers and other technology-related expenditures through continued capital investment over the next several years.

Building a long-term, sustainable business

We believe Facebook is a company that is being managed for the long term, as Mark Zuckerberg clearly states in his shareholder letter that Facebook doesn’t build services to make money, but rather makes money to build better services. As such, management at times may make key investment decisions that could have negative implications in the near term but are designed for long-term, sustainable growth. We think a long-term focus coupled with rapid innovation and product launches may help prevent product decisions that could put user loyalty and experience at risk.

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Key Facebook Products and Features

The key components of the Facebook platform as it exists today include several product components that launched over the past few years. While some notable products, such as the Wall or Photos, have helped to drive user growth and engagement, other products have aided advertisers in leveraging Facebook’s reach and social context to serve and create better ads.

Figure 30: Key Product Launches


MonthlyActive

Users (M) Key Products Launch Description

1 Wall Sept 2004 Forum for users to post messages to friends

6 Photos Oct 2005 Enabled users to upload photos

Facebook Mobile Apr 2006 Facebook available for mobile devices

12 API Aug 2006 Developers to connect

News Feed Sept 2006 Scrolling updates

Facebook Platform May 2007 Launched with 65 developers and 85 applications

58 Self-service Ad Platform Nov 2007 Enables advertisers to manage ad campaigns

Pages Nov 2007 Profile pages for companies and brands

Chat Apr 2008 Instant messaging capabilities

Facebook Connect Dec 2008 Enables partner sites to allow users to login with Facebook accounts

Like button Feb 2009 Button to indicate user preferences and recommendations

Facebook Payments May 2009 Allows for in-app purchases using Facebook Credits

Graph API Apr 2010 Developer access to Facebook's social graph

608 Social Plugins Apr 2010 Lets users see what friends have liked, commented, shared across the web

Groups Oct 2010 Allows users to organize groups around common interests and topics

Sponsored Stories Jan 2011 Advertisements built around user social interactions on right side of page

Timeline Sept 2011 New user profile interface on chronological basis

Apps for Timeline Jan 2012 Applications and widgets in Timeline profiles

Sponsored Stories in News Feed Jan 2012 Ads with social context in News Feed

Offers Feb 2012 New placements of Offers and update to Pages

Sponsored Stories - Mobile Mar 2012 Ads with social context in mobile news feed

Interest Lists Mar 2012 Allows users to connect with people with similar interests

Photo Viewer Enhancements Mar 2012 Includes high resolution photos and full screen viewing

Android App Shortcuts Apr 2012 Includes shortcuts to share photos and messages from home screen

958 (E) Facebook Camera Mobile App May 2012 A mobile app to make photos faster to upload and access

App Center Jun 2012 A new interface to discover social apps (desktop and mobile)

Facebook Exchange Summer Real-time-bidding Ad Exchange

iOS 6 Integration Fall Deep integration with Apple mobile operating system

145

360

845

901

1,015 (E)

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Key User Products

Photos

Launched in 2005, Facebook is one of the most popular photo uploading and sharing services on the Internet, with an average of 300M photos uploaded a day in 1Q12. Facebook users can upload an unlimited number of photos and set privacy settings to specify to whom they are visible. Users can add captions and “tag” people in the photos, a unique identifying feature that leverages users’ friend connections to enhance the usability and sharing capabilities of photos. We believe the Photos feature in Facebook has been one of the social network’s greatest traffic drivers and expect it to be an important part of Facebook’s future growth.

News Feed

The News Feed is the main interface of a user’s homepage which features scrolling headlines of all stories from a user’s friends, pages “Liked,” and interests. The News Feed is personalized based on the user’s friend connections and includes posts, photos, event updates, and Sponsored Stories. Updates are prioritized based on social signals of importance such as time, popularity of content among friends, and the type of content posted. The News Feed interface is also the main starting screen in mobile apps. According to comScore, users spend the highest percentage of their time (40%) on the News Feed, making it one of the most valuable ad spaces available to advertisers on Facebook.

Timeline

At the f8 conference in September 2011, Facebook announced Timeline, an updated version of the Facebook profile for both users and brand pages. Timeline enables users to organize and share content in a searchable personal narrative that is displayed chronologically. Timeline was rolled out broadly in 1Q12 with the ability to add apps and widgets to profiles.

Key Advertiser Products

Pages

Facebook enables brands, advertisers, and companies to create Pages to engage and communicate with their users and customers. This free service provides brands and companies with a Facebook profile page that can be subscribed to and “Liked.”Advertisers and brands frequently promote links to their Facebook Pages in their major brand advertisements. Creating a Pages site is usually one of the first interactions between advertisers and Facebook, as it provides the ability for companies to experiment with social networking advertising without any direct investment. According to comScore, the Skittles brand attracted 320,000 unique visitors to its brand page on Facebook in March 2012, 14x more than it had on its www.skittles.com site in the same period.

Ads and Sponsored Stories

Facebook serves several types of online ads, among which there are several formats including traditional display ads, ads with social context, and Sponsored Stories. Advertisers can pay for these ads on a CPC or CPM basis, depending on what the ad campaign is designed to achieve. Facebook provides value to advertisers through its reach and scale of its 901M-plus users and unique targeting capabilities which include profile information, status updates, and relationships.

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First launched in January 2011, Sponsored Stories enable advertisers to re-broadcast posts from users’ friends or Pages in the form of an ad on the right side of the page. In January 2012 Sponsored Stories have been included into the News Feed, and in March into the mobile News Feed. We believe Sponsored Stories in News Feeds are likely to have a higher impact than display ads with social context, as they resemble regular News Feed updates so closely that many users may not even realize they are ads at all. Sponsored Stories leverage social connections to reinforce brands and ads, effectively allowing advertisers to purchase word-of-mouth marketing. According to Kenshoo Social, Sponsored Stories have the highest exposure rate among Facebook’s ad formats, indicating that amplification works to get a brand’s message out, in addition to having nearly 2x the CTR as other Facebook ads.We believe this is an even greater factor on mobile devices with the audience’s captive focus on the News Feed given the screen format of the mobile app, though mobile monetization levels may not be at par with desktop at this point.

Figure 31: Sponsored Stories Have Highest Exposure Rate of Facebook Ads

Source: Kenshoo Social and J.P. Morgan estimates.

Facebook Premium and Reach Generator

At the fMC event in February, Facebook announced a new premium advertising solution called Reach Generator, designed to help large clients looking to reach a higher percentage of their Fans through sponsored activity. Advertisers pay Facebook on an ongoing basis to sponsor a daily one-page post with the guarantee of reaching 75% of the page’s fan base over the period of a month, extending the average reach of 16%, as seen in the figure below. An example of this was Ben &Jerry’s which reported reaching 98% of its fan base and that every $1 spent on Facebook returned $3 in incremental sales as measured by Nielsen Marketing Mix Analysis.

0.5% 1.2%

36.0%

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Post Ad Social Ad Sponsored Story Web Ad

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Key Developer Products

Platform, API, and Open Graph

Platform, API, and Open Graph enable developers to leverage the Facebook user base to drive engagement on their own sites, mobile apps, or Facebook Apps. One example of this is users logging into partner sites or apps using their Facebook account, enabling the partner site or app to access the user’s friend lists and other information shared on Facebook. This enables a user’s Facebook profile to be used as their online identity without the need to create additional logins for sites that opt to develop and partner with Facebook. Though there is no direct economic inflow associated with these partnerships at this time, Facebook benefits through increased user engagement. We believe it is not inconceivable that Facebook may be able monetize these partnerships in some manner at some point.

App Center

In June, Facebook launched the App Center, an interface on both desktop and mobile that helps users discover new apps. A top-level App Center link is located at the top-left sidebar of the desktop page and within the left menu screen on mobile devices. It highlights and promotes apps that connect to Facebook, even those that only use FB Connect for authentication purposes. The App Center currently features 600-plus apps and is being rolled out on a limited basis.

Developers can create an App Detail Page to describe their apps and incorporate social context (which friends use it), including direct links to install it into a Facebook.com account or to Apple App Store/Google Play on mobile devices. Facebook has added a tool in the Open Graph API that allows developers to see what devices users are using so that developers can create device-specific ads for those users. Facebook has also launched a beta program for paid apps that lets people pay a flat fee to use an app on Facebook.com.

iOS 6 Integration

At the Worldwide Developers Conference 2012, Apple announced a deep integration with iOS 6 and Facebook. We expect this integration to be a significant driver of user engagement as it lowers the barrier for iPhone and iPad users to post, update, and check information on Facebook. Signing into Facebook accounts directly in Apple iOS 6 allows for seamless content sharing from any interface on the iPhone and iPad. While this may not directly generate any significant revenue, we view any driver of increased engagement and content to be beneficial to Facebook’s user engagement, which in turn should drive incremental advertising dollars.

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Figure 32: Facebook iOS 6 Integration

Source: Company site. Note: Used with permission.

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Current Business

User Growth and Engagement

Facebook’s engagement continues to rise globally as comScore data shows an increasing percentage of minutes spent online are on Facebook. Accounting for ~3% of total minutes in 1Q09, worldwide users now spend ~14% of their time online on Facebook as of 1Q12. Engagement measured by Daily Average Users and Monthly Average Users supports this, showing an increase from ~47% to ~58% over a comparable time period.

Figure 33: Facebook Engagement Continues to Rise

Source: Company reports, comScore, and J.P. Morgan estimates.

Advertising

Facebook currently generates nearly 80% of its revenues from online advertising, primarily consisting of targeted display ads. Facebook provides advertisers with a reach of over 901M users, high engagement metrics, and audience targeting capabilities that exceed those of any other platform both online and offline. Advertisers pay for ads displayed on Facebook on a clicks or impression basis with the ability to specify audience targeting by leveraging Facebook’s database of user information and social actions.

Facebook manages its advertising customer base either through direct sales or its self-service marketplace. Direct sales teams are assigned to brands and large advertisers to assist in managing ad campaigns across the Facebook platform. Smaller and individual advertisers can access all of the same advertising products through Facebook’s self-service marketplace.

3.3%

14.2%

46.7%

58.4%

30.0%

35.0%

40.0%

45.0%

50.0%

55.0%

60.0%

0.0%

2.0%

4.0%

6.0%

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10.0%

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14.0%

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20.0%

1Q

09

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09

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% of Minutes Spent on FB DAU / MAU

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Ad Formats

Facebook provides advertisers with two primary types of ad formats: standard display and display ads with social context such as sponsored stories. These ads are generally displayed on the right rail of the page. While both types of display ads can be highly targeted towards a specific demographic audience, ads with social context highlight a friend’s social interactions or connections to companies and brands through a user’s social network. According to comScore, 15.2% of all U.S. display ads were socially enabled in March 2012, up from 8.2% in November 2011. An example of an ad with social context can include a “Like” or comments, as seen in the example below.

Figure 34: Standard Display Ad Format

Source: Company website.

Note: Used with permission.

Figure 35: Display Ad With Social Context

Source: Company website.

Note: Used with permission.

In January 2012, Sponsored Stories were integrated into the News Feed. According to comScore, users spend the highest percentage of their time (40%) on the News Feed, making it a more valuable ad space available to advertisers than any other parts of Facebook, even including brand pages. Sponsored Stories allow advertisers to re-broadcast social interactions between a user’s friends and brands, such as a “Like” action. We believe Sponsored Stories are designed to blend in with a user’s other News Feed headlines, making them a primary method of brand exposure. As of March 2012, Facebook integrated Sponsored Stories into the mobile app and News Feed. As Facebook reported an increase of 50%-plus in ad recall for Facebook ads with social context, we believe these types of ads will be a primary driver of advertising growth going forward.

Data and Targeting

Facebook’s ad offering is differentiated for advertisers due to its massive scale and reach of users, large database of user information and social interactions, and the ability to amplify ads through social networks. Advertisers can target display ads to a subset of Facebook’s users based on publicly shared information submitted by users. Such info can include general demographic characteristics such as age, gender, location, relationship status, or even specific interests indicated by the use of Facebook’s “Like” button on various sites and partners. We believe this level of

39



targeting exceeds the ability of other competing platforms, both offline and online, and is a feature that makes Facebook an integral part of brand ad campaigns.

In addition to targeting, Facebook’s ads with social context provide advertisers with the ability to differentiate by complementing their products and brands with recommendations from friends within a user’s direct social network. In an analysis of 79 ad campaigns, Facebook reported an increase of 50%-plus in ad recall for Facebook ads with social context compared to standard Facebook display ads. As advertisers increasingly see the value in ads on social networks, ads with social context should continue to proliferate.

For a Facebook ad campaign to be effective on an advertiser ROI basis, there must be a comprehensive ad strategy around the campaign, in our view. While certain metrics, such as the number of fans for a brand page, are very easy to measure, we believe there is still some difficulty in calculating and measuring the performanceand ROI of Facebook ad campaigns. A recent comScore study “The Power of Like 2” highlights the importance of Fan Reach, Engagement, and Amplification. Fan Reach and Engagement are achieved through brand pages and interactions with fans, but amplification is a difficult metric to achieve and measure. Amplification refers to the brand’s ability to leverage its Fans to serve as a conduit for brand exposure to each of their own social networks. We believe advertisers are still in early stages of understanding, strategizing, and evaluating their Facebook ad campaigns and see potential for upside as ROI measurement continues to develop.

Pricing and Revenue by Geography

In 2011, half of Facebook’s advertising revenues were generated in the U.S. and Canada, 32% in Europe, 10% in Asia, and 8% in the rest of the world.

Figure 36: Facebook Advertising Revenue by Geography

$ in millions


2010A 2011A 2012E 2013E 2014E

Global Summary

Global Advertising Revenue 1,868 3,154 3,904 5,104 6,670Y/Y Growth 69% 24% 31% 31%

US & Canada Advertising Revenue 1,071 1,583 1,755 2,042 2,363Y/Y Growth 48% 11% 16% 16%

% of Total Advertising Revenue 57% 50% 45% 40% 35%

Europe Advertising Revenue 555 1,002 1,136 1,452 1,883

Y/Y Growth 81% 13% 28% 30%


Asia Advertising Revenue 143 313 552 820 1,160

Y/Y Growth 119% 76% 49% 41%% of Total Advertising Revenue 8% 10% 14% 16% 17%

ROW Advertising Revenue 25 256 460 790 1,264

Y/Y Growth 934% 80% 72% 60%


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Facebook reported 2011 revenue per average MAU of $5.11 (advertising-only ARPU of $4.34), considerably lower than those of its online advertising peers such as Google or Yahoo!, as seen in the figure below. We estimate that, even on a CPM basis, Facebook’s average CPM is in the range of $0.30-$0.40 in the U.S. andCanada, with other regional CPMs close to half of that or less. We believe the pricing discount is primarily attributed to the limited variety of ad formats for Facebook’s display ads and the learning curve of how to leverage social media ads for advertisers. We expect pricing to continue to improve, potentially accelerated byFacebook’s unique targeting capabilities and improving ad formats.

Figure 37: Facebook Revenue per User Compared to Other Internet Companies


Near-term growth drivers

We believe the inclusion of Sponsored Stories in the desktop News Feed as of January will be a key driver of online ad growth in the near term. Not only does the News Feed represent the highest touch-point to the user, Sponsored Stories are re-broadcasts of real social interactions from friends and are nearly indistinguishable from regular updates. In our view, this adds a higher degree of credibility and trustworthiness to the ads that other display ads may be unable to achieve. While ads on the right rail may be automatically relegated as ads in the minds of users, News Feed Sponsored Stories blend in with all the other updates and leverage social connections to reinforce the ad exposure. We believe ads with social context such as Sponsored Stories will become a key addition to many brand advertisers on Facebook and help to drive advertising revenue growth.

In March, Facebook launched Sponsored Stories for mobile apps and has subsequently begun to sell mobile-only News Feed ads. We believe Facebook may be able to charge a higher CPM for mobile-only Sponsored Stories than desktop CPMs, given the limited screen size on mobile devices and highly captive viewing experience. Mobile apps are also likely to have more frequent ad impressions than desktop ads as users can access the app anywhere, anytime. Though mobile user growth is currently outpacing the growth in advertising revenue contribution, we believe improving mobile ad formats such as location-based ads could become a source of advertising revenue growth going forward.

$28.26

$8.63 $7.49 $6.44$5.11 $4.47 $3.91

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GOOG ZNGA YHOO Tencent FB LNKD Twitter Renren

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Payments

In 2011, 59% of Facebook’s payment revenues were generated in the U.S. and Canada, 28% in Europe, 9% in Asia, and 4% in the rest of the world.

Figure 38: Facebook Payments Revenue by Geography

$ in millions


Facebook generates its Payments revenue by charging fees to Platform developers for the sale of virtual and digital goods to users. At this time, the majority of Facebook’s Payments revenue is generated from virtual good sales in social games. Zynga is the largest platform developer using Facebook’s Payments platform, and contributed 12% of revenue in 2011 from Payments processing fees, with an additional 7% related to ads displayed on Zynga apps. Facebook has indicated it may seek to extend its Payments platform to other types of apps in the future with potentially varying fee structures.

Currently, users purchase Facebook Credits as currency for digital or virtual goods bought on the platform. These credits are held as deposits until the user completes a purchase, at which time Facebook takes a 30% transaction fee and remits the remaining 70% to the developer. On June 19, Facebook announced two changes to its payment products:

Subscriptions. Starting in July, Facebook plans to enable developers to offer subscription plans for in-app purchases of virtual items in social games. Developers will be able to manage recurring revenues and offer premium content to its paying subscribers. The first developers to test this are KIXEYE and Zynga.

Currency pricing. Facebook is updating its Payments platform to support pricing in local currencies instead of Facebook Credits. This transition is to support developers that currently convert Facebook Credits to their own form of credits to circumvent local currency issues. Developers will be able to set prices on a market-by-market basis and this feature will be integrated into subscriptions.

2010A 2011A 2012E 2013E 2014E

Payment and Other Fees

Global Payments and Other Fees 106 557 928 1,409 2,007Y/Y Growth 425% 67% 52% 42%

US & Canada 75 331 526 803 1,104Y/Y Growth 340% 59% 53% 37%

% of Total Payment Revenue 71% 59% 57% 57% 55%

Europe 22 153 269 409 592

Y/Y Growth 587% 76% 52% 45%


Asia 6 50 93 141 221

Y/Y Growth 813% 86% 51% 57%% of Total Payment Revenue 5% 9% 10% 10% 11%

Rest of World 3 22 40 56 90

Y/Y Growth 672% 76% 43% 60%


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In June, Facebook launched the App Center, an app marketplace interface on both desktop and mobile designed to help users discover new apps. While most of the apps are expected to remain free and supported by in-app purchases, Facebook is offering developers a chance to sell paid apps by charging users flat fees to access their apps on Facebook. As the paid apps program is still in beta testing, the exact economics are not clear yet. We do not expect the App Center to drive incremental revenue at this time, as we view the App Center to be focused more on app discovery. We note that one interesting feature is the ability to push apps to mobile devices from the desktop interface.

We believe in-app purchases of virtual and digital goods through social games will remain the primary revenue driver in the near term, as other social gaming companies beyond Zynga begin to expand their presence on the Facebook platform. Facebook’s users are an attractive social gaming audience, as developers are able to leverage social connections between friends to promote games and increase engagement. In the long term, we look for other potential sources of Payments revenue to come from other verticals such as music, news, and possibly even movies, though we recognize that the fee structure may differ from the 70/30 split seen with social game developers.

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Financial Outlook

Addressing recent revenue deceleration in 4Q11 and 1Q12

Facebook’s revenue growth decelerated to 55% Y/Y in 4Q11 and 45% Y/Y in 1Q12 from triple-digit growth in the first three quarters of 2011. We believe several factors in Facebook’s advertising business contributed to this change, along with the underlying usage shift from desktop to mobile usage. 4Q11 had a difficult Y/Y comp as Facebook had significantly increased the number of ads displayed to users in 4Q10, resulting in higher advertising revenue in the year-ago period. Also during the quarter Facebook removed ads from photo pages for a period of time and increased pricing to improve ad quality on the site.

Figure 39: Facebook Revenue and Growth Rates by Quarter

$ in millions


1Q12 saw continued rapid shift in usage toward mobile, thereby negatively impacting revenue. In addition, we believe Facebook experienced softness in Europe and saw its mix shift of ads move more toward geographies with lower pricing such as Asia and ROW.

We believe these factors may have extended into 2Q12 as well, and Facebook has specifically highlighted the trend of DAUs increasing more rapidly than the growth in ads delivered, with mobile cited as a primary factor. In addition, we believe Timeline pages initially showed fewer ads per page than previous profile pages.

EBITDA margins declined in 1Q12 to 56.1% from the low 60s in 2011 partly due to slower revenue growth, but also due to: 1) increase in cost of revenues from higher data-center expenses and payment processing fees from rising Payments volume; 2) increase in sales and marketing due to an increase in user, developer, and advertiser-facing marketing as well as higher headcount in global sales, business development, and customer service; 3) higher R&D costs from an increase of 55% in employee headcount in engineering, design, product management, and other

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technical roles, and;4) higher G&A costs from increasing headcount-related expenses.

In 2Q12, we expect continued heavy investments in products, mobile, new ad formats, and technology infrastructure. We model gross margins and EBITDA margins to trough in 2Q12 at 73.6% and 53.1%, respectively. In addition, we look for 2Q12 stock-based compensation of $1B.

Expect reacceleration in revenue growth in 2H12

For the remainder of 2012, we forecast reacceleration in growth as we model 2Q12 to be the trough in both revenue growth and margins. We forecast 3Q12 and 4Q12 revenue growth of 26% Y/Y and 30% Y/Y, respectively, driving total 2012 revenue growth of 30%. We look for Facebook’s newer ad formats to begin to show up in numbers in 2H12, particularly Sponsored Stories. 4Q12 will also benefit from a significantly easier Y/Y comp. We look for EBITDA margins to improve in 3Q12 and 4Q12 to 54.3% and 54.6% (vs. 53.1% in 2Q12), as we believe Facebook is efficiently increasing revenue through improved ad formats and Payments segment contribution.

We expect Facebook to continue to make significant investments in technology, including building its own data centers, the first of which was completed in April 2011 in Oregon. We forecast capex spending of $1.7 billion in 2012 including capital leases, resulting in FCF of $845 million.

Three-year outlook

In the advertising segment, Facebook in our view will continue to improve its ad formats with greater social context and targeting capabilities. As advertisers continue to shift brand budgets online and increasingly focus on social networking, we believe Facebook can be a primary beneficiary. In Payments, Facebook’s social games developer base is likely to continue expanding beyond Zynga to become a meaningful contributor to Facebook’s revenues. In addition, we believe Facebook may find new ways to monetize its Payments platform to contribute to higher growth.

We model acceleration in revenue growth to continue in 2013 to 35% Y/Y, with EBITDA margins expanding to 56.4%. In 2014, we forecast revenue growth of 33% and EBITDA margins of 57.3%. We look for Facebook to gain leverage in each of its cost lines as it improves its efficiency and scale in its advertising business, with increasing contributions from the Payments segment over the next three years. We expect Sales and Marketing to continue to be Facebook’s largest operating cost item, followed by R&D, though we expect Y/Y revenue growth to outpace growth in operating expenses. We are modeling Facebook to continue investing in O&O data centers, with capex increasing to $1.8B (including capital leases) in 2014.

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Figure 40: Facebook Revenues and EBITDA Margins

$ in millions


Corporate income taxes and SBC. We expect Facebook to build a significant net operating loss in 2012 as a result of vesting of a significant number of RSUs and options. The company’s 277 pre-2011 RSUs awarded to employees vest upon the satisfaction of both a service and liquidity condition—the latter being satisfied six months after the company’s IPO. As the liquidity condition had not been met prior to the IPO (up to 1Q12 financials), Facebook has not recognized any stock-based compensation related to these pre-2011 RSUs. However, given the IPO in 2Q12, the company will begin recording stock compensation expense related to the pre-2011 RSUs using the accelerated attribution method and, hence, we expect the company to record ~$1 billion in SBC in 2Q12, likely making the company unprofitable on a GAAP Net Income basis this quarter. In addition, SBC in 2013 will remain elevated due to recognition of pre-2011 RSUs—we project 2013 SBC of $780M.

The company expects ~277M shares underlying the pre-2011 RSUs to settle 151-181 days after the IPO and RSU holders will recognize taxable income based on the value of the shares on the date they are settled. RSUs will be net settled so Facebook will withhold ~122M shares of Class B common stock and Facebook will remit an equivalent dollar amount to the relevant tax authorities in cash. In order to fund this remittance, Facebook expects to sell shares roughly six months after the IPO in an amount equivalent to the tax withholding requirement mentioned above—~$4B or 122M shares based on a stock price of $33/share. Note that this share sale will not be dilutive but it will increase the public float in addition to the six-month lock-up expiration.

In addition to the RSUs mentioned above, the company expects options equivalent to 185M shares of Class B stock to vest and settle in 2012. The exercise of the RSUs and options will result in a corporate income tax deduction of ~$14.4B based onFB stock trading at current levels ($33/share) upon settlement. The amount of this deduction exceeding the company’s U.S. taxable income will result in a net operating loss (NOL) that can be used to receive a refund on taxes paid in 2010-11—

$1,974

$3,711

$4,832

$6,513

$8,677

60.3%61.9%

54.5%56.4% 57.3%

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

2010 2011 2012E 2013E 2014E

Revenue EBITDA Margin

46



a $500M refund payable in 2013—and any portion of the NOL remaining after the carry-back can be used to offset U.S. taxable income in future years. We value Facebook’s NOL at ~$4.3B by offsetting estimated U.S. pre-tax income through 2017 (discounted to present value) and recognizing a $500M refund in 2013.

Early Lock-Up Expirations Could Create Volatility in the Near Term

On May 18, Facebook offered 421.2M Class A shares in its IPO for $38 per share, at the top of the $34-$38 pricing range. Facebook sold 180M Class A shares with the remaining 241.2M Class A shares from prior investors. Facebook adopted a dual-class share structure between Class A and B shares, with Class A shares representing one vote each and Class B shares with ten votes each. Mark Zuckerberg exercised an option to purchase 120M Class B shares that can be converted immediately to Class A shares, of which he sold 30.2M Class A shares in the IPO. After the IPO, Mark Zuckerberg holds over 57% of the voting power in Facebook.

As shown in the table below, Facebook’s first tranche of 268M post-IPO Class A shares are unlocked on 8/16/12—just three months after the company’s IPO rather than the typical six-month lock-up—and we believe this could increase volatility in the near term. In addition, as described in the company’s S-1 filing, the company’s IPO triggers the vesting of a large number of RSUs and Options with a very low cost basis, valued at ~$14B at current trading levels. For tax withholding purposes, Facebook will attempt to sell secondary shares worth roughly 45% of the vested RSUs/Options (~$4B) six months post its IPO. While no new shares will be sold in this transaction, the planned sale will increase overall supply.

Figure 41: Facebook Post-IPO Share Lock-Up Expiration Schedule

Source: Company reports and J.P. Morgan.

Date Event

Shares

Outstanding

Additional

Shares

Ending Public

Float Description05/17/2012 IPO 2623 421 42108/16/2012 Lock-up Exp. 2623 268 689 268M shrs held by selling stockholders excl Mark Zuckerberg

11/14/2012 Lock-up Exp. 2623 247 936 ~137M RSUs, 55mm shrs and 55mm underlying options for Mark Zuckerberg

11/14/2012 Lock-up Exp. 2623 1241 2177 1,223M sh & 18M RSUs12/14/2012 Lock-up Exp. 2623 124 2301 124M sh held by selling stockholders other than Mark Zuckerberg

05/18/2013 Lock-up Exp. 2623 47 2348 47M sh held by Mail.ru and DST

47



Valuation

Our year-end 2013 price target of $45 on Facebook is derived using an average of a target EV/EBITDA multiple ($39 price/share) and our DCF analysis ($51 price/ share). We believe Facebook is a unique Internet asset with high revenue growth, strong competitive barriers, and significant upside potential as a key Internet platform, and therefore deserves to trade at a premium to most Internet names. We utilize a combination of a 2014E EV/EBITDA multiple and a DCF analysis to take into account Facebook’s strong near-term financial profile and also the future potential of the Facebook platform. As noted throughout our report, we believe there are many material growth drivers for Facebook in the coming years.

We believe Facebook will be most often comped against LinkedIn given both companies’ social characteristics, strong financial profiles, and early-stage natures. However, in addition to LinkedIn, we also look at Facebook relative to a group of high-growth Internet leaders including Google, Amazon, Tencent, Baidu, Priceline, Zynga, and Mail.ru Group.

Figure 42: High-Growth Internet Comparables

$ in millions

Source: Bloomberg and J.P. Morgan estimates.

Relative Valuation

EV/EBITDA. We apply a target EV/EBITDA multiple of 17x on our 2014E EBITDA of $5B which implies a $39 stock price. Facebook currently trades at 19x on a 2013E EV/EBITDA basis, and we assume a slight step down for looking an incremental year out. We believe the company deserves a premium to most Internet peers based on its high growth potential and strong network effects. However, we would expect LinkedIn to receive a higher multiple based on its significantly higher growth rate, subscription-based revenue characteristics, transparent model, and early public track record of beating numbers.

P/E. Facebook trades at 51x our 2013 PF EPS estimate of $0.66 versus high-growth comps such as Amazon and LinkedIn trading at 52x and 79x 2013E EPS, respectively. At our $45 price target Facebook would trade essentially in line with LNKD on a PF EPS basis.

Prices as of Market 11-14

Company 6/26/2012 Cap EV 2012 2013 2014 2012 2013 2014 2012 2013 2014 Rev CAGR 2012 2013 2014 Ratings Covering Analyst

Primary CompsGoogle Inc GOOG $564.68 188,115 133,685 3.8x 2.9x 2.2x 7.0x 5.4x 4.0x 13.3x 11.4x 9.8x 18% 9.9x 7.7x 5.6x OW Doug AnmuthAmazon.com Inc AMZN $225.61 104,288 90,356 1.4x 1.1x 0.8x 23.5x 16.5x 11.9x 78.2x 52.2x 40.8x 27% 31.9x 19.1x 13.7x OW Doug AnmuthTencent Holdings Ltd TCTZF $28.30 51,689 48,744 7.5x 5.6x 4.2x 17.2x 13.0x 10.0x 25.2x 19.9x 16.1x 33% 20.8x 15.0x 11.4x OW Dick WeiBaidu Inc BIDU $110.59 39,267 35,995 10.1x 6.8x 4.9x 18.0x 12.2x 9.0x 23.8x 17.0x 13.4x 42% 22.6x 15.6x 11.0x OW Dick Wei

priceline.com Inc PCLN $656.36 33,898 30,795 5.8x 4.5x 3.5x 15.4x 11.3x 8.4x 20.8x 16.1x 13.2x 21% 20.2x 14.4x 10.6x OW Doug AnmuthLinkedIn Corp LNKD $106.42 12,085 11,344 12.5x 8.7x 6.5x 62.6x 36.6x 24.0x 166.9x 79.2x 49.3x 50% 102.2x 69.6x 56.6x OW Doug AnmuthZynga Inc ZNGA $5.77 4,984 3,721 2.4x 1.8x 1.3x 8.0x 4.9x 3.3x 18.8x 12.5x 10.2x 24% 82.2x 6.9x 4.6x OW Doug AnmuthMail.ru Group Ltd MAIL LI $31.34 6,552 6,026 8.9x 6.7x 5.3x 17.7x 13.1x 10.2x 26.9x 20.7x 16.9x 26% 25.3x 16.3x 12.5x OW Alexei Gogolev

Mean 6.6x 4.8x 3.6x 21.2x 14.1x 10.1x 46.7x 28.6x 21.2x 39.4x 20.6x 15.7xMedian 6.6x 5.0x 3.8x 17.4x 12.6x 9.5x 24.5x 18.4x 14.8x 23.9x 15.3x 11.2x

Facebook - Current FB $33.10 82,750 67,374 13.9x 10.7x 8.0x 25.6x 19.0x 13.9x 66.5x 50.5x 36.0x 33% 84.8x 40.2x 25.3xFacebook - EV/EBITDA PT FB $39.00 97,500 82,124 17.0x 13.2x 9.8x 31.2x 23.3x 17.1x 78.4x 59.5x 42.5x 33% 102.3x 48.8x 30.9xFacebook - Final PT FB $45.00 112,500 97,124 20.1x 13.2x 9.8x 36.9x 23.3x 17.1x 90.4x 68.7x 49.0x 33% 120.0x 48.8x 30.9x

OW Doug Anmuth

EV/Revenue EV/FCFP/EEV/EBITDA

48



EV/FCF. On an EV/FCF basis, Facebook trades at 40x our 2013 FCF estimate of $1.9B. Amazon and LinkedIn trade at 2013E FCF multiples of 19x and 70x, respectively.

EV/Revenue. On an EV/Revenue basis, Facebook currently trades at 11x our 2013 revenue estimate of $6.5B, above other higher-growth Internet peers trading in a range of 6-8x.

DCF analysis

Our DCF analysis supports a valuation of $51 per share. Our DCF assumes a discount rate of 11% based on a more normalized 10-year Treasury of 3%, estimated beta of 1.30, an equity risk premium of 5.50%, and a bit more conservatism. We assume a 3% terminal growth rate which is in line with to a bit below that utilized when looking at other high-growth Internet names. Our DCF incorporates an estimated 2012-2020 revenue CAGR of 26% and an EBITDA CAGR of 27%. In addition, we include a sensitivity analysis around our DCF assumptions in the figure below.

Figure 43: Facebook DCF Analysis

$ in millions except per-share data

Source: Company data and J.P. Morgan estimates.

2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Revenue 4,832.0 6,512.8 8,676.8 11,323.3 14,592.1 18,094.2 21,894.0 25,835.0 29,968.6 % Change 30.2% 34.8% 33.2% 30.5% 28.9% 24.0% 21.0% 18.0% 16.0%

Adjusted EBITDA 2,635.1 3,672.1 4,973.9 6,533.7 8,464.8 10,496.3 12,700.5 14,986.6 17,384.5 % Change 14.8% 39.4% 35.4% 31.4% 29.6% 24.0% 21.0% 18.0% 16.0% % margin 54.5% 56.4% 57.3% 57.7% 58.0% 58.0% 58.0% 58.0% 58.0%

Cash Taxes (207.9) (184.3) (346.5) (585.3) (2,207.7) (3,358.8) (4,064.2) (4,795.7) (5,563.0)Capex (1,331.1) (1,367.7) (1,475.1) (1,585.3) (1,721.9) (2,171.3) (2,627.3) (3,100.2) (3,596.2)PP&E acquired under capital leases (398.0) (423.3) (459.9) (509.5) (576.4) (542.8) (656.8) (775.0) (899.1)Change in Working Capital 76.6 58.9 67.9 63.7 67.1 100.0 100.0 100.0 100.0Unlevered Free Cash Flow 774.6 1,755.8 2,760.3 3,917.3 4,025.9 4,523.3 5,452.2 6,415.6 7,426.2 % Change 47.0% 126.7% 57.2% 41.9% 2.8% 12.4% 20.5% 17.7% 15.8%

Terminal EBITDA Multiple 12.9x 12.9xDiscount Rate 11.0% 11.0%Terminal Value 223,825.0 223,825.0Implied Terminal FCF Multiple 30.1x 30.1x

Present Value of FCF 19,842 21,250 Present Value of Terminal Value 87,498.7 97,123.6Implied Firm Value 107,341.0 118,373.9

Gross Cash Balance 11,079.7 13,858.7 Adjusted EBITDA Terminal Multiple

PV of Future Tax Benefits 4,296.2 4,762.1 10.9x 11.9x 12.9x 13.9x 14.9x

Plus: Total Cash 15,375.9 18,620.8 8.0% $54 $58 $61 $65 $68

Less: Debt - - 9.0% $51 $54 $58 $61 $64

Implied Equity Value 122,716.9 136,994.7 10.0% $48 $51 $54 $57 $60

11.0% $46 $48 $51 $54 $57

Fully Diluted Shares Outstanding 2,500.0 2,675.0 12.0% $43 $46 $48 $51 $54

13.0% $41 $43 $46 $48 $51

Equity Value Per Share $49.09 $51.21 14.0% $39 $41 $43 $46 $48

Dis

cou

nt R

ate

DCF Sensitivity Analysis

49



Figure 44: J.P. Morgan Internet Comps


(US$, millions except per share)

Company Google Facebook Yahoo! eBay Amazon Netflix Priceline.com Expedia TripAdvisor LinkedIn Groupon Zynga Pandora HomeAway Bankrate CafePress ReachLocal Quinstreet

Symbol GOOG FB YHOO EBAY AMZN NFLX PCLN EXPE TRIP LNKD GRPN ZNGA P AWAY RATE PRSS RLOC QNST

JP Morgan Rating OW OW N N OW N OW N N OW N OW OW OW N OW OW N

Price as of 6/26/2012 $564.68 $33.10 $15.35 $42.50 $225.61 $66.80 $656.36 $46.40 $44.01 $106.42 $10.25 $5.77 $10.36 $20.48 $17.79 $14.22 $10.70 $9.27

Shares Outstanding 2012 333 2,500 1,229 1,316 462 55 51.645 139 138 114 674 865 169 86 102 17 29 47

Shares Outstanding 2013 338 2,675 1,234 1,326 465 55 52.345 138 140 116 704 890 172 88 103 18 29 46

Shares Outstanding 2014 343 2,729 1,239 1,336 468 55 52.945 137 142 118 725 908 176 90 104 18 30 462,010

Market Capitalization $188,115 $82,750 $18,866 $55,909 $104,288 $3,645 $33,898 $6,429 $6,054 $12,085 $6,905 $4,984 $1,751 $1,770 $1,809 $245 $311 $4342,010

Total Enterprise Value 2012 $135,011 $67,374 $4,749 $46,115 $92,917 $3,295 $31,038 $6,340 $6,053 $11,726 $5,462 $3,461 $1,679 $1,517 $1,874 $158 $210 $400



EARNINGS PER SHARE (EPS) (1)

EPS 2012 $42.55 $0.50 $1.13 $2.30 $2.82 $0.97 $31.63 $2.76 $1.55 $0.64 $0.14 $0.31 -$0.10 $0.50 $0.84 $0.81 $0.34 $0.83

EPS 2013 $49.54 $0.66 $1.20 $2.69 $4.24 $3.39 $40.65 $3.33 $1.85 $1.34 $0.87 $0.46 -$0.07 $0.67 $1.06 $1.13 $0.41 $0.88

EPS 2014 $57.88 $0.92 $1.30 $3.12 $5.45 $5.93 $49.65 $3.89 $2.18 $2.16 $1.14 $0.57 $0.18 $0.90 $1.34 $1.43 $0.69 $0.91

2011 - 2014 EPS CAGR 17% 22% 11% 15% 23% 7% 28% 12% 14% 82% NM 33% NM 20% 29% 35% 30% -4%

P/E 2012 13.3x 66.5x 13.6x 18.5x 79.9x 68.6x 20.8x 16.8x 28.4x 166.9x 72.4x 18.8x NM 41.3x 21.1x 17.6x 31.1x 11.2x

P/E-to-Growth 0.8x 3.0x 1.2x 1.2x 3.5x 10.1x 0.7x 1.4x 2.0x 2.0x NA 0.6x NM 2.1x 0.7x 0.5x 1.0x NM

P/E 2013 11.4x 50.5x 12.8x 15.8x 53.2x 19.7x 16.1x 14.0x 23.8x 79.2x 11.8x 12.5x NM 30.7x 16.8x 12.6x 26.1x 10.5x

P/E 2014 9.8x 36.0x 11.8x 13.6x 41.4x 11.3x 13.2x 11.9x 20.2x 49.3x 9.0x 10.2x 59.1x 22.7x 13.3x 10.0x 15.6x 10.2x2,010

FREE CASH FLOW (FCF)

FCF 2012 $13,544 $845 $1,324 $3,404 $2,833 $76 $1,528 $691 $203 $111 $345 $45 -$20 $74 $73 $15 $19 $53

FCF 2013 $15,730 $1,856 $1,216 $3,953 $4,529 $39 $2,029 $752 $241 $164 $603 $488 -$8 $93 $120 $20 $26 $53

FCF 2014 $18,706 $2,885 $1,220 $4,534 $5,919 $30 $2,545 $815 $285 $202 $996 $629 $19 $108 $146 $25 $35 $55

2011-2014 FCF CAGR 19% 83% 15% 25% 45% -47% 25% 10% 13% 66% 51% 61% NM 19% 51% 29% 61% -8%

FCF/Share 2012 $40.66 $0.34 $1.08 $2.59 $6.13 $1.39 $29.59 $4.98 $1.47 $0.98 $0.51 $0.05 -$0.12 $0.86 $0.72 $0.89 $0.67 $1.14

FCF/Share 2013 $46.52 $0.69 $0.98 $2.98 $9.74 $0.71 $38.77 $5.46 $1.72 $1.42 $0.86 $0.55 -$0.05 $1.06 $1.16 $1.08 $0.89 $1.16

FCF/Share 2014 $54.51 $1.06 $0.98 $3.40 $12.64 $0.54 $48.07 $5.97 $2.00 $1.71 $1.37 $0.69 $0.11 $1.21 $1.40 $1.34 $1.17 $1.19

Price/FCF 2012 13.9x 97.9x 14.3x 16.4x 36.8x 47.9x 22.2x 9.3x 29.8x 108.9x 20.0x 110.1x NM 23.8x 24.8x 16.0x 16.1x 8.2x

P/FCF-to-Growth 0.7x 1.2x 1.0x 0.7x 0.8x -1.0x 0.9x 1.0x 2.3x 1.7x 0.4x 1.8x NA 1.2x 0.5x 0.6x 0.3x -1.0x

Price/FCF 2013 12.1x 47.7x 15.6x 14.3x 23.2x 93.6x 16.9x 8.5x 25.6x 75.2x 12.0x 10.5x NM 19.4x 15.3x 13.1x 12.0x 8.0x

Price/FCF 2014 10.4x 31.3x 15.6x 12.5x 17.8x 124.3x 13.7x 7.8x 22.0x 62.1x 7.5x 8.3x 98.1x 17.0x 12.7x 10.6x 9.1x 7.8x

FCF Yield 2012 7.2% 1.0% 7.0% 6.1% 2.7% 2.1% 4.5% 10.7% 3.4% 0.9% 5.0% 0.9% -1.2% 4.2% 4.0% 6.3% 6.2% 12.3%

FCF Yield 2013 8.2% 2.1% 6.4% 7.0% 4.3% 1.1% 5.9% 11.8% 3.9% 1.3% 8.4% 9.5% -0.4% 5.2% 6.5% 7.6% 8.3% 12.5%

FCF Yield 2014 9.7% 3.2% 6.4% 8.0% 5.6% 0.8% 7.3% 12.9% 4.6% 1.6% 13.4% 12.0% 1.0% 5.9% 7.9% 9.4% 11.0% 12.9%

EBITDA 2,010

EBITDA 2012 $19,180 $2,635 $1,649 $4,429 $3,810 $137 $1,994 $762 $347 $181 $380 $464 -$10 $79 $169 $27 $20 $72

EBITDA 2013 $22,529 $3,672 $1,773 $5,040 $5,186 $338 $2,596 $867 $421 $312 $916 $687 -$5 $102 $206 $40 $31 $70

EBITDA 2014 $26,326 $4,974 $1,857 $5,706 $6,758 $558 $3,210 $958 $499 $477 $1,166 $857 $44 $131 $245 $50 $45 $74

2011-2014 EBITDA CAGR 18% 29% 3% 14% 37% 5% 29% 10% 16% 69% NM 41% 155% 25% 22% 38% 41% -7%

EV/EBITDA 2012 7.0x 25.6x 2.9x 10.4x 24.4x 24.0x 15.6x 8.3x 17.4x 64.8x 14.4x 7.5x NM 19.2x 11.1x 5.9x 10.4x 5.5x

EV/EBITDA-to-Growth 0.4x 0.9x 0.8x 0.7x 0.7x 4.7x 0.5x 0.8x 1.1x 0.9x NA 0.2x NA 0.8x 0.5x 0.2x 0.3x NM



REVENUE 2,010

Revenue 2012 $34,841 $4,832 $4,521 $13,733 $61,837 $3,575 $5,349 $3,854 $781 $904 $2,372 $1,522 $425 $279 $542 $232 $446 $363

Revenue 2013 $41,145 $6,513 $4,664 $15,749 $78,033 $4,065 $6,544 $4,248 $938 $1,305 $3,114 $1,904 $606 $344 $641 $293 $528 $350

Revenue 2014 $47,903 $8,677 $4,781 $17,611 $96,088 $4,728 $7,800 $4,633 $1,099 $1,766 $3,661 $2,216 $823 $418 $730 $346 $618 $363

2011-2014 Revenue CAGR 18% 33% 3% 15% 26% 14% 21% 10% 20% 50% 31% 24% 44% 22% 20% 25% 18% -3%

5.4x 17.1x 4.2x 4.1x 1.7x 1.0x 6.3x 1.7x 7.7x 13.4x 2.9x 3.3x 4.1x 6.4x 3.3x 1.1x 0.7x 1.2x

Market Cap/Revenue 2013 4.6x 13.6x 4.1x 3.6x 1.3x 0.9x 5.3x 1.5x 6.6x 9.4x 2.3x 2.7x 2.9x 5.3x 2.9x 0.9x 0.6x 1.2x

Market Cap/Revenue 2014 4.0x 10.4x 4.0x 3.2x 1.1x 0.8x 4.5x 1.4x 5.7x 7.1x 2.0x 2.4x 2.2x 4.4x 2.5x 0.8x 0.5x 1.2x

Notes:

1) All EPS shown are Pro Forma, to exclude the impact of stock based compensation.

2) P/E and P/FCF for Yahoo! does not adjust for Yahoo! Japan

3) Pandora's calendar year estimates are used (e.g., FY2012 equates to ~CY2011. QuinStreet's FY estimates (with a June year-end) are used.

Source: Company reports and JP Morgan estimates

Market Cap/Revenue 2012

50



Financial Models

Figure 45: Facebook Income Statement

$ in millions


2010A 2011A 1Q12A 2Q12E 3Q12E 4Q12E 2012E 2013E 2014ERevenue 1,974 3,711 1,058 1,105 1,200 1,468 4,832 6,513 8,677

Cost of Revenue 493 851 273 292 308 377 1,251 1,661 2,152Gross Profit 1,481 2,860 785 814 892 1,091 3,581 4,852 6,525

Operating ExpensesMarketing and Sales 182 384 136 175 196 225 731 977 1,284Research and Development 135 274 93 109 119 141 462 606 772General and Administrative 112 229 72 92 102 125 391 495 616Stock-based Compensation 20 217 103 1,000 210 257 1,570 780 677

Total Operating Expenses 449 1,104 404 1,376 627 747 3,154 2,858 3,349Operating Income 1,032 1,756 381 (562) 265 344 428 1,994 3,176

PF Operating Income 1,052 1,973 484 438 475 601 1,998 2,774 3,852

Other income (expense), net (24) (61) 1 18 26 27 72 100 124Pre-tax Income 1,008 1,695 382 (544) 292 371 500 2,094 3,300

Income Taxes 402 695 177 68 122 148 516 921 1,386Effective Tax Rate 40% 41% 46% NA 42% 40% 103% 44% 42%

GAAP Net Income 606 1,000 205 (613) 169 222 (16) 1,173 1,914

GAAP EPS $0.43 $0.09 ($0.25) $0.07 $0.08 ($0.01) $0.44 $0.70

Diluted Shares Out 2,332 2,361 2,451 2,554 2,634 2,500 2,675 2,729

Non-GAAP Pre-tax Income 1,912 485 456 502 628 2,070 2,874 3,977

Income Taxes 732 192 182 201 251 826 1,121 1,471Effective Tax Rate 38% 40% 40% 40% 40% 40% 39% 37%

Non-GAAP Net Income 1,180 293 273 301 377 1,244 1,753 2,505Non-GAAP EPS $0.51 $0.12 $0.11 $0.12 $0.14 $0.50 $0.66 $0.92

EBITDA Calculation

Operating Income 1,032 1,756 381 (562) 265 344 428 1,994 3,176Stock-based compensation 20 217 103 1,000 210 257 1,570 780 677

Depreciation and Amortization 139 323 110 149 177 201 637 898 1,121EBITDA 1,191 2,296 594 587 652 802 2,635 3,672 4,974

2010A 2011A 1Q12A 2Q12E 3Q12E 4Q12E 2012E 2013E 2014EY/Y GrowthRevenue 154% 88% 45% 24% 26% 30% 30% 35% 33%

Cost of Revenue 121% 73% 63% 41% 32% 55% 47% 33% 30%Gross Profit 167% 93% 39% 18% 24% 23% 25% 35% 34%

Marketing and Sales 61% 111% 100% 90% 81% 94% 90% 34% 31%Research and Development 67% 103% 75% 71% 58% 72% 69% 31% 27%General and Administrative 58% 104% 50% 50% 89% 92% 71% 27% 24%Stock-based Compensation -26% 985% 1371% 1463% 200% 238% 624% -50% -13%

Total Operating Expenses 54% 146% 130% 390% 104% 120% 186% -9% 17%Operating Income 294% 70% -2% -238% -36% -37% -76% 366% 59%PF Operating Income 264% 88% 23% -7% -2% -4% 1% 39% 39%

GAAP Net Income 165% 65% -12% -355% -26% -26% -102% NM 63%GAAP EPS -13% -343% -32% -35% -102% NM 60%Non-GAAP EPS 20% -8% -2% -11% -2% 32% 40%EBITDA 225% 93% 33% 6% 14% 10% 15% 39% 35%Q/Q Growth

Revenue -6% 4% 9% 22%Operating Income -30% -248% -147% 30%PF Operating Income -22% -10% 9% 26%EBITDA -18% -1% 11% 23%% of Revenue

Cost of Revenue 25.0% 22.9% 25.8% 26.4% 25.7% 25.7% 25.9% 25.5% 24.8%Gross Profit 75.0% 77.1% 74.2% 73.6% 74.3% 74.3% 74.1% 74.5% 75.2%

Marketing and Sales 9.2% 10.3% 12.9% 15.8% 16.3% 15.3% 15.1% 15.0% 14.8%Research and Development 6.8% 7.4% 8.8% 9.9% 9.9% 9.6% 9.6% 9.3% 8.9%General and Administrative 5.7% 6.2% 6.8% 8.3% 8.5% 8.5% 8.1% 7.6% 7.1%Stock-based Compensation 1.0% 5.8% 9.7% 90.5% 17.5% 17.5% 32.5% 12.0% 7.8%

Operating Income 52.3% 47.3% 36.0% -50.9% 22.1% 23.4% 8.8% 30.6% 36.6%PF Operating Income 53.3% 53.2% 45.7% 39.6% 39.6% 40.9% 41.3% 42.6% 44.4%EBITDA 60.3% 61.9% 56.1% 53.1% 54.3% 54.6% 54.5% 56.4% 57.3%

51



Figure 46: Facebook Segment Summary

$ in millions


2010A 1Q11 2Q11 3Q11 4Q11A 2011A 1Q12A 2Q12E 3Q12E 4Q12E 2012E 2013E 2014ESummary

Advertising 1,868 637 776 798 943 3,154 872 890 957 1,185 3,904 5,104 6,670Y/Y Growth 145% 87% 83% 77% 44% 69% 37% 15% 20% 26% 24% 31% 31%Q/Q Growth -3% 22% 3% 18% -8% 2% 7% 24%% of Total Revenues 95% 87% 87% 84% 83% 85% 82% 81% 80% 81% 81% 78% 77%

Payments and Other Fees 106 94 119 156 188 557 186 215 244 284 928 1,409 2,007Y/Y Growth 715% 1780% 1388% 818% 147% 425% 98% 81% 56% 51% 67% 52% 42%Q/Q Growth 24% 27% 31% 21% -1% 16% 13% 16%% of Total Revenues 5% 13% 13% 16% 17% 15% 18% 19% 20% 19% 19% 22% 23%

Total Revenue 1,974 731 895 954 1,131 3,711 1,058 1,105 1,200 1,468 4,832 6,513 8,677Y/Y Growth 154% 112% 108% 104% 55% 88% 45% 24% 26% 30% 30% 35% 33%Q/Q Growth 0% 22% 7% 19% -6% 4% 9% 22%Seasonality 20% 24% 26% 30% 22% 23% 25% 30%

Revenue per MAU (ARPU) SummaryUS & Canada $8.62 $2.49 $2.84 $2.80 $3.19 $11.50 $2.86 $2.87 $2.82 $3.21 $11.86 $13.04 $14.29Europe $3.85 $1.19 $1.33 $1.34 $1.60 $5.61 $1.40 $1.25 $1.28 $1.71 $5.68 $6.61 $8.08Asia $1.49 $0.42 $0.50 $0.56 $0.56 $2.08 $0.53 $0.60 $0.69 $0.73 $2.57 $2.93 $3.42Rest of World $0.27 $0.31 $0.39 $0.40 $0.41 $1.56 $0.37 $0.41 $0.51 $0.56 $1.88 $2.45 $3.19

Total $4.08 $1.14 $1.26 $1.24 $1.38 $5.11 $1.21 $1.19 $1.22 $1.41 $5.05 $5.55 $6.27

Y/Y GrowthUS & Canada 41% 52% 45% 16% 33% 15% 1% 1% 0% 3% 10% 10%Europe 58% 49% 59% 29% 46% 17% -6% -4% 6% 1% 16% 22%Asia 37% 37% 59% 23% 40% 27% 21% 22% 29% 24% 14% 17%Rest of World 82% 72% 77% 21% 468% 19% 6% 29% 39% 21% 30% 30%Total 32% 30% 34% 37% 9% 25% 7% -6% -2% 3% -1% 10% 13%

Q/Q GrowthUS & Canada -10% 14% -1% 14% -10% 0% -2% 14%Europe -4% 12% 1% 20% -13% -10% 2% 33%Asia -8% 18% 13% 0% -5% 13% 14% 6%Rest of World -7% 24% 2% 3% -9% 11% 24% 11%Total -10% 11% -2% 11% -12% -2% 2% 16%

Geographic Revenue BreakdownBased on User LocationUS & Canada 1,146 394 471 482 567 1,914 525 549 557 651 2,282 2,845 3,467Europe 577 229 275 290 361 1,155 328 308 324 445 1,406 1,860 2,475Asia 149 62 82 104 115 363 118 145 179 204 645 961 1,380Rest of World 28 46 67 77 88 278 87 104 141 168 500 847 1,355Total 1,900 731 895 954 1,131 3,711 1,058 1,105 1,200 1,468 4,832 6,513 8,677

% of TotalUS & Canada 60% 54% 53% 51% 50% 52% 50% 50% 46% 44% 47% 44% 40%Europe 30% 31% 31% 30% 32% 31% 31% 28% 27% 30% 29% 29% 29%Asia 8% 8% 9% 11% 10% 10% 11% 13% 15% 14% 13% 15% 16%Rest of World 1% 6% 7% 8% 8% 8% 8% 9% 12% 11% 10% 13% 16%

Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Y/Y GrowthUS & Canada 84% 89% 78% 38% 67% 33% 16% 15% 15% 19% 25% 22%Europe 139% 113% 117% 66% 100% 43% 12% 12% 23% 22% 32% 33%Asia 182% 156% 182% 100% 145% 90% 76% 72% 77% 78% 49% 44%Rest of World 254% 228% 210% 102% 907% 89% 56% 82% 90% 79% 69% 60%

Total 112% 108% 104% 55% 95% 45% 24% 26% 30% 30% 35% 33%

52



Figure 47: Facebook Revenue Drivers—Users

$ in millions


2010A 2011A 1Q12A 2Q12E 3Q12E 4Q12E 2012E 2013E 2014EUser Metrics

Monthly Active Users (MAU)

US & Canada 154 179 188 194 201 206 206 231 255Europe 183 229 241 250 256 266 266 298 327Asia 138 212 230 249 270 290 290 366 442Rest of World 133 225 242 265 288 306 306 386 465Total 608 845 901 958 1,015 1,068 1,068 1,280 1,488

Y/Y Growth

US & Canada 38% 16% 15% 15% 14% 15% 15% 12% 11%Europe 56% 25% 20% 18% 16% 16% 16% 12% 10%Asia 123% 54% 47% 43% 38% 37% 37% 26% 21%

Rest of World 93% 69% 51% 44% 39% 36% 36% 26% 21%Total 69% 39% 33% 30% 27% 26% 26% 20% 16%

Country Mix

US & Canada 25% 21% 21% 20% 20% 19% 19% 18% 17%Europe 30% 27% 27% 26% 25% 25% 25% 23% 22%

Asia 23% 25% 26% 26% 27% 27% 27% 29% 30%Rest of World 22% 27% 27% 28% 28% 29% 29% 30% 31%Total 100% 100% 100% 100% 100% 100% 100% 100% 100%

Mobile MAU 245 432 488 548 609 667 667 915 1,146

Y/Y Growth 143% 76% 69% 69% 62% 55% 55% 37% 25%Q/Q Growth 13% 12% 11% 10%

% of total MAUs 40.3% 51.1% 54.2% 57.2% 60.0% 62.5% 62.5% 71.5% 77.0%Mobile-Only MAU 15 58 83 117 152 189 189 343 491

Y/Y Growth -- 287% 277% 290% 281% 226% 226% 81% 43%Q/Q Growth 43% 41% 30% 24%

% of total MAUs 2.5% 6.9% 9.2% 12.2% 15.0% 17.7% 17.7% 26.8% 33.0%Web and Mobile MAU 230 374 405 431 457 478 478 572 655

Y/Y Growth 128% 63% 52% 46% 36% 28% 28% 20% 14%Q/Q Growth 8% 6% 6% 5%

% of total MAUs 37.8% 44.3% 45.0% 45.0% 45.0% 44.8% 44.8% 44.7% 44.0%Web Only MAU 363 413 413 410 406 400 400 365 342

Y/Y Growth 40% 14% 5% -1% -4% -3% -3% -9% -6%Q/Q Growth 0% -1% -1% -1%

% of total MAUs 59.7% 48.9% 45.8% 42.8% 40.0% 37.5% 37.5% 28.5% 23.0%

Daily Active Users (DAU)

US & Canada 99 126 129 136 143 149 149 171 191Europe 107 143 152 159 169 180 180 216 251Asia 64 105 119 132 141 153 153 209 263Rest of World 57 109 126 139 152 164 164 232 297Total 327 483 526 565 604 646 646 828 1,002

DAU as % of MAU

US & Canada 64.3% 70.4% 68.6% 69.8% 71.1% 72.2% 72.2% 74.2% 75.2%Europe 58.5% 62.4% 63.1% 63.5% 65.8% 67.8% 67.8% 72.7% 76.6%Asia 46.4% 49.5% 51.7% 52.9% 52.2% 52.8% 52.8% 57.0% 59.5%Rest of World 42.9% 48.4% 52.1% 52.5% 52.8% 53.4% 53.4% 60.2% 64.0%Total 53.8% 57.2% 58.4% 59.0% 59.5% 60.5% 60.5% 64.7% 67.3%

Y/Y Growth

US & Canada 55% 27% 23% 16% 15% 18% 18% 15% 12%Europe 70% 34% 27% 25% 25% 26% 26% 20% 16%

Asia 121% 64% 65% 55% 44% 46% 46% 36% 26%Rest of World 97% 91% 68% 58% 52% 50% 50% 42% 28%Total 77% 48% 41% 36% 32% 34% 34% 28% 21%

Country Mix

US & Canada 30% 26% 25% 24% 24% 23% 23% 21% 19%

Europe 33% 30% 29% 28% 28% 28% 28% 26% 25%Asia 20% 22% 23% 23% 23% 24% 24% 25% 26%Rest of World 17% 23% 24% 25% 25% 25% 25% 28% 30%Total 100% 100% 100% 100% 100% 100% 100% 100% 100%

53



Figure 48: Facebook Revenue Drivers—Advertising

$ in millions


2010A 2011A 1Q12A 2Q12E 3Q12E 4Q12E 2012E 2013E 2014EGlobal SummaryGlobal Advertising

Advertising Impressions 11,000 15,500 4,600 4,610 4,844 5,461 19,615 23,755 28,446Y/Y Growth 41% 35% 17% 22% 25% 27% 21% 20%Q/Q Growth 5% 0% 5% 13%

Average Cost Per Thousand (CPM) $0.17 $0.20 $0.19 $0.19 $0.20 $0.22 $0.20 $0.21 $0.23Y/Y Growth 20% 1% -2% -2% 1% 0% 8% 9%Q/Q Growth -12% 2% 2% 10%

Global Advertising Revenue 1,868 3,154 872 890 957 1,185 3,904 5,104 6,670Y/Y Growth 69% 37% 15% 20% 26% 24% 31% 31%Q/Q Growth -8% 2% 7% 24%

Regional BreakdownUS & Canada

Advertising Impressions 4,455 1,200 1,182 1,164 1,275 4,821 5,295 5,836Y/Y Growth 8% 5% 9% 10% 8% 10% 10%Q/Q Growth 4% -1% -2% 10%

Average Cost Per Thousand (CPM) $0.36 $0.35 $0.36 $0.36 $0.39 $0.36 $0.39 $0.40Y/Y Growth 16% 3% -3% -3% 3% 6% 5%Q/Q Growth -13% 3% 0% 8%

US & Canada Advertising Revenue 1,071 1,583 419 426 418 493 1,755 2,042 2,363Y/Y Growth 48% 26% 8% 6% 7% 11% 16% 16%% of Total Advertising Revenue 57% 50% 48% 48% 44% 42% 45% 40% 35%

Europe

Advertising Impressions 5,549 1,800 1,524 1,483 1,900 6,708 7,962 9,355Y/Y Growth 40% 12% 15% 18% 21% 19% 18%Q/Q Growth 12% -15% -3% 28%

Average Cost Per Thousand (CPM) $0.18 $0.15 $0.16 $0.17 $0.19 $0.17 $0.18 $0.20Y/Y Growth -5% -11% -10% 1% -6% 8% 10%Q/Q Growth -20% 6% 6% 12%

Europe Advertising Revenue 555 1,002 274 246 254 363 1,136 1,452 1,883Y/Y Growth 81% 33% 0% 3% 19% 13% 28% 30%

% of Total Advertising Revenue 30% 32% 31% 28% 27% 31% 29% 28% 28%

Asia

Advertising Impressions 2,646 700 841 990 1,023 3,554 4,549 5,640Y/Y Growth 38% 25% 35% 40% 34% 28% 24%Q/Q Growth -4% 20% 18% 3%

Average Cost Per Thousand (CPM) $0.12 $0.14 $0.15 $0.16 $0.17 $0.16 $0.18 $0.21Y/Y Growth 29% 33% 30% 32% 32% 16% 14%Q/Q Growth 9% 3% 7% 10%

Asia Advertising Revenue 143 313 99 123 154 176 552 820 1,160Y/Y Growth 119% 77% 66% 76% 85% 76% 49% 41%% of Total Advertising Revenue 8% 10% 11% 14% 16% 15% 14% 16% 17%

Rest of World

Advertising Impressions 3,089 1,000 1,063 1,208 1,262 4,533 5,949 7,615Y/Y Growth 86% 35% 38% 42% 47% 31% 28%Q/Q Growth 13% 6% 14% 5%

Average Cost Per Thousand (CPM) $0.08 $0.08 $0.09 $0.11 $0.12 $0.10 $0.13 $0.17Y/Y Growth 0% 13% 36% 35% 23% 31% 25%Q/Q Growth -11% 13% 20% 12%

ROW Advertising Revenue 25 256 80 96 131 153 460 790 1,264Y/Y Growth 934% 86% 52% 87% 92% 80% 72% 60%% of Total Advertising Revenue 1% 8% 9% 11% 14% 13% 12% 15% 19%

54



Figure 49: Facebook Revenue Drivers—Payments

$ in millions


2010A 2011A 1Q12A 2Q12E 3Q12E 4Q12E 2012E 2013E 2014EPayment and Other FeesGlobal Payments and Other FeesTotal Payments and Other Fees 106 557 186 215 244 284 928 1,409 2,007

Y/Y Growth 425% 98% 81% 56% 51% 67% 52% 42%Q/Q Growth -1% 16% 13% 16%

0.96Revenue per Avg. DAU $0.41 $1.38 $0.37 $0.39 $0.42 $0.45 $1.64 $1.91 $2.19


Revenue Per Avg. MAU (ARPU) $0.22 $0.77 $0.21 $0.23 $0.25 $0.27 $0.97 $1.20 $1.45


Regional BreakdownUS & Canada

Payment and Other Fees Revenue 75 331 106 123 139 159 526 803 1,104Y/Y Growth 340% 71% 59% 59% 51% 59% 53% 37%% of Total Payment Revenue 71% 59% 57% 57% 57% 56% 57% 57% 55%

Revenue per Avg. DAU $0.92 $2.94 $0.83 $0.93 $1.00 $1.09 $3.83 $5.02 $6.09Y/Y Growth 219% 37% 33% 38% 30% 30% 31% 21%Q/Q Growth -1% -69% 20% 18%

Revenue per Avg. MAU (ARPU) $0.57 $1.99 $0.58 $0.64 $0.70 $0.78 $2.73 $3.68 $4.55Y/Y Growth 251% 48% 38% 39% 32% 37% 35% 24%Q/Q Growth -2% -68% 22% 22%

Europe

Payment and Other Fees Revenue 22 153 54 62 71 82 269 409 592Y/Y Growth 587% 135% 108% 56% 49% 76% 52% 45%% of Total Payment Revenue 21% 28% 29% 29% 29% 29% 29% 29% 30%

Revenue per Avg. DAU $0.26 $1.23 $0.37 $0.40 $0.43 $0.47 $1.67 $2.06 $2.54Y/Y Growth 367% 81% 65% 25% 19% 36% 24% 23%Q/Q Growth -7% -67% 18% 17%


Asia


Revenue per Avg. DAU $0.12 $0.59 $0.17 $0.17 $0.18 $0.19 $0.72 $0.78 $0.94Y/Y Growth 402% 92% 68% 1% -2% 21% 8% 20%Q/Q Growth -14% -71% 5% 12%


Rest of World


Revenue per Avg. DAU $0.07 $0.27 $0.06 $0.06 $0.07 $0.09 $0.29 $0.28 $0.34Y/Y Growth 300% 31% 32% -15% 17% 7% -2% 20%Q/Q Growth -22% -76% 12% 39%

Revenue per Avg. MAU (ARPU) $0.03 $0.13 $0.03 $0.03 $0.04 $0.05 $0.15 $0.16 $0.21Y/Y Growth 336% 46% 46% -7% 29% 19% 9% 30%Q/Q Growth -19% -73% 18% 41%

55



Figure 50: Facebook Balance Sheet

$ in millions


2010A PF 2011A PF 1Q12A 2Q12E 3Q12E 4Q12E 4Q13E 2014EAssets

Cash and cash equivalents 1,785 1,512 1,282 7,838 7,962 8,452 11,231 14,575 Marketable securities - 2,396 2,628 2,628 2,628 2,628 2,628 2,628 Accounts receivable 373 547 482 486 498 609 767 920 Prepaid expenses and other current assets 88 478 627 553 600 441 434 434

Total Current Assets 2,246 4,933 5,019 11,506 11,688 12,130 15,059 18,557

Property and equipment 574 1,475 1,855 2,093 2,312 2,566 3,460 4,274 Goodwill and intangible assets, net 96 162 189 739 739 739 739 739 Other assets 74 90 121 121 121 121 121 121

Total Assets 2,990 6,660 7,184 14,458 14,860 15,555 19,379 23,690

Liabilities and Stockholder's Equity

Accounts payable 29 63 129 111 156 73 153 217 Platform partners payable 75 171 178 177 204 235 334 434 Accrued expenses and other current liabilities 137 296 337 337 337 337 337 337 Deferred revenue and deposits 42 90 93 99 108 117 133 174 Current portion of capital lease obligations 106 279 302 265 264 272 287 304

Total Current Liabilities 389 899 1,039 989 1,069 1,034 1,244 1,465

Capital lease obligations, less current portion 117 398 404 404 404 404 404 404 LT Debt 250 - - - - - - - Other liabilities 72 135 144 144 144 144 144 144

Total Liabilities 828 1,432 1,587 1,537 1,617 1,582 1,792 2,013

Stockholders Equity

Convertible preferred stock 615 - - Common stock - - - 6,871 6,685 6,792 6,631 7,803 Additional paid-in capital 947 4,267 4,433 5,499 5,837 6,238 8,841 9,845 Accumulated other comprehensive loss (6) (6) (7) (7) (7) (7) (7) (7) Retained earnings 606 967 1,171 558 727 950 2,123 4,037

Total Stockholder's Equity 2,162 5,228 5,597 12,921 13,243 13,973 17,587 21,677

Total Liabilities and Stockholder's Equity 2,990 6,660 7,184 14,458 14,860 15,555 19,379 23,690

Balance Check OK OK OK OK OK OK OK OK

Total Gross Cash 1,785 3,908 3,910 10,466 10,590 11,080 13,859 17,203

Total revenue 1,974 3,711 1,058 1,105 1,200 1,468 1,970 8,677 Cost of Revenue 493 851 273 292 308 377 502 2,152 Accounts receivable, net of allowance 373 547 482 486 498 609 767 920 A/R DSOs 17 13 42 40 38 38 36 10 % of Revenue 19% 15% 46% 44% 42% 42% 39% 11%Prepaid expenses and other current assets 88 478 627 553 600 441 434 434 % of Revenue 4% 13% 59% 50% 50% 30% 22% 5%Accounts payable 29 63 129 111 156 73 153 217 A/P DSPs 1 2 11 9 12 5 7 2 % of Revenue 1% 2% 12% 10% 13% 5% 8% 3%Platform partners payable 75 171 178 177 204 235 334 434 % of Revenue 4% 5% 17% 16% 17% 16% 17% 5%Deferred revenue and deposits 42 90 93 99 108 117 133 174 % of Revenue 2% 2% 9% 9% 9% 8% 7% 2%Current portion of capital lease obligations 106 279 302 265 264 272 287 304 % of Revenue 5% 8% 29% 24% 22% 19% 15% 4%

56



Figure 51: Facebook Cash Flow Statement

$ in millions


2010A 2011A 1Q12A 2Q12E 3Q12E 4Q12E 2012E 2013E 2014ENet Income 606 1,000 205 (613) 169 222 (16) 1,173 1,914 Depreciation and Amortization 139 323 110 149 177 201 637 898 1,121 Loss on write-off of equipment 3 4 1 1 - Share-based compensation 20 217 103 1,000 210 257 1,570 780 677

Tax benefit from share-based award activity 115 433 54 - - - 54 - - Excesss tax benefit from share-based award activity (115) (433) (54) 62 110 133 251 737 1,039

Accounts Receivable (209) (174) 65 (4) (12) (111) (62) (158) (153) Prepaid expenses and other current assets (38) (31) (28) 74 (47) 160 158 7 (0) Other assets 17 (32) (32) (32) - Accounts Payable 12 6 (3) (18) 45 (83) (59) 80 64

Platform partners payable 75 96 7 (1) 27 31 64 99 100 Accrued expenses and other current liabilities 20 38 2 - - - 2 - - Deferred Revenue and deposits 37 49 3 6 9 9 27 16 40 Other liabilities 16 53 8 (37) (1) 8 (22) 15 17

Change in Working Capital (70) 5 22 20 21 14 77 59 68 Net Cash from Operating Activities 698 1,549 441 618 687 828 2,574 3,647 4,820

Purchases of property and equipment (293) (606) (453) (276) (264) (338) (1,331) (1,368) (1,475) Purchases of marketable securities - (3,025) (876) (876) - Maturities of marketable securities - 516 567 567 - Sales of marketable securities - 113 69 69 - Investments in non-marketable equity securities - (3) (1) (1) - Acquisitions of business, net of cash acquired (22) (24) (25) (550) (300) (875) -

Change in restricted cash and deposits (9) 6 (1) (1) - Net Cash used in Investing Activities (324) (3,023) (720) (826) (564) (338) (2,448) (1,368) (1,475)

Net proceeds from inssuance of convertible preferred stock - - - - Net proceeds from issuance of common stock 500 998 - 6,765 6,765 Proceeds from exercise of stock options 6 28 5 5 Proceeds from (repayments of) LT Debt 250 (250) - -

Proceeds from sale and lease-back transactions - 170 62 62 Principle payments on capital lease obligations (90) (181) (71) (71) Excess tax benefit from share-based award activity 115 433 54 54 500 Net Cash provided by Financing Activities 781 1,198 50 6,765 - - 6,815 500 -

Effect of FX (3) 3 (1) (1) Net Increase/Decrease in Cash and Cash Equivalents 1,152 (273) (230) 6,556 123 490 6,940 2,779 3,344

Cash at BOP 633 1,785 1,512 1,282 7,838 7,962 1,512 8,452 11,231 Cash at EOP 1,785 1,512 1,282 7,838 7,962 8,452 8,452 11,231 14,575

Fair Value of shares issued related to acquisitions of biz and other 60 58 6

Capex (293) (606) (453) (276) (264) (338) (1,331) (1,368) (1,475) Y/Y Growth 788% 107% 120% 3% 8%% of Revenue 15% 16% 43% 25% 22% 23% 28% 21% 17%

Property and equipment acquired under capital leases (217) (473) (38) (111) (132) (117) (398) (423) (460) Y/Y Growth 288% 118% -16% 6% 9%% of Revenue 11% 13% 4% 10% 11% 8% 8% 7% 5%

Capex + Capital Lease PPE (510) (1,079) (491) (387) (396) (455) (1,729) (1,791) (1,935) Y/Y Growth 473% 112% 60% 4% 8%% of Revenue 26% 29% 46% 35% 33% 31% 36% 28% 22%

Depreciation and Amortization

D&A 139 323 110 149 177 201 637 898 1,121 Depreciation as % of Revenue 7% 9% 10% 13% 15% 14% 13% 14% 13%Depreciation as % of Avg Period PPE 42% 34% 7% 8% 8% 8% 32% 30% 29%

Property Plant and EquipmentPPE, BOP 148 574 1,475 1,855 2,093 2,312 1,475 2,567 3,460 + Capital Expenditures (Incl. PPE Under Cap Lease) 510 1,079 491 387 396 455 1,729 1,791 1,935

- Depreciation (139) (323) (110) (149) (177) (201) (637) (898) (1,121) Net PPE, EOP 519 1,330 1,856 2,093 2,312 2,566 2,567 3,460 4,274 Reported Net PPE, EOP 574 1,475 1,855

FCF CalculationNet Cash from Operating Activities 698 1,549 441 618 687 828 2,574 3,647 4,820

Less: Capex (293) (606) (453) (276) (264) (338) (1,331) (1,368) (1,475)

Less: Property and equipment acquired under capital leases (217) (473) (38) (111) (132) (117) (398) (423) (460) Free Cash Flow 188 470 (50) 231 291 373 845 1,856 2,885

Y/Y Growth 185% 150% 80% 120% 55%Free Cash Flow Excluding Tax Benefit 188 470 (50) 170 181 239 540 1,118 1,845

Y/Y Growth 185% 150% 15% 107% 65%

57



Facebook: Summary of FinancialsIncome Statement - Annual FY11A FY12E FY13E FY14E Income Statement - Quarterly 1Q12A 2Q12E 3Q12E 4Q12E

Revenues 3,711 4,832 6,513 8,677 Revenues 1,058A 1,105 1,200 1,468

Operating Income 1,973 1,998 2,774 3,852 Operating Income 484A 438 475 601D&A 323 637 898 1,121 D&A 110A 149 177 201EBITDA 2,296 2,635 3,672 4,974 EBITDA 594A 587 652 802

Net interest income / (expense) (42) - - - Net interest income / (expense) - - - -Other income / (expense) (19) - - - Other income / (expense) - - - -Pretax income 1,695 500 2,094 3,300 Pretax income 382A (544) 292 371

Income taxes 695 516 921 1,386 Income taxes 177A 68 122 148Net income 1,000 (16) 1,173 1,914 Net income 205A (613) 169 222Weighted average diluted shares 2,332 2,500 2,675 2,729 Weighted average diluted shares 2,361A 2,451 2,554 2,634

Diluted EPS 0.51 0.50 0.66 0.92 Diluted EPS 0.12A 0.11 0.12 0.14

Balance Sheet and Cash Flow Data FY11A FY12E FY13E FY14E Ratio Analysis FY11A FY12E FY13E FY14E

Cash and cash equivalents 1,512 8,452 11,231 14,575 Sales growth 88.0% 30.2% 34.8% 33.2%Accounts receivable 547 609 767 920 EBITDA growth 92.8% 14.8% 39.4% 35.4%Other current assets 2,874 3,069 3,062 3,062 EPS growth - (1.7%) 31.7% 40.1%

Current assets 4,933 12,130 15,059 18,557PP&E 1,475 2,566 3,460 4,274 EBITDA margin 61.9% 54.5% 56.4% 57.3%Total assets 6,660 15,555 19,379 23,690 Net margin - - - -

Total debt 0 0 0 0 Debt / EBITDA - - - -Total liabilities 1,432 1,582 1,792 2,013

Shareholders' equity 5,228 13,973 17,587 21,677 Return on assets (ROA) - - - -Return on equity (ROE) - - - -

Net Income (including charges) 1,000 (16) 1,173 1,914

D&A 323 637 898 1,121 Enterprise value / EBITDA - - - -Change in working capital 5 77 59 68 Enterprise value / Free cash flow - - - -Other P/E 65.4 66.5 50.5 36.0

Cash flow from operations 1,549 2,574 3,647 4,820Capex (606) (1,331) (1,368) (1,475)Free cash flow 470 845 1,856 2,885

Cash flow from investing activities (3,023) (2,448) (1,368) (1,475)Cash flow from financing activities 1,198 6,815 500 0Dividends - - - -

Dividend yield - - - -

Source: Company reports and J.P. Morgan estimates.Note: $ in millions (except per-share data).Fiscal year ends Dec

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Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

Market Maker: JPMS makes a market in the stock of Facebook.

Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Facebook within the past 12 months.

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Facebook.

Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Facebook.

Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: Facebook.

Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: Facebook.

Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking Facebook.

Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Facebook.

Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from Facebook.

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or emailing [email protected] with your request.

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N= Neutral, UW = Underweight

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the

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Facebook (FB, FB US) Price Chart

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

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average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] In our Asia (ex-Australia) and UK small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.morganmarkets.com.

Coverage Universe: Anmuth, Doug: Amazon.com (AMZN), Bankrate Inc (RATE), CafePress, Inc. (PRSS), Expedia, Inc. (EXPE), Google (GOOG), Groupon (GRPN), HomeAway Inc (AWAY), LinkedIn Corp (LNKD), Netflix Inc (NFLX), Pandora Media Inc (P), Priceline.com (PCLN), QuinStreet, Inc. (QNST), ReachLocal (RLOC), TripAdvisor, Inc. (TRIP), Yahoo Inc (YHOO), Zynga Inc (ZNGA), eBay, Inc (EBAY)

J.P. Morgan Equity Research Ratings Distribution, as of April 3, 2012

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 45% 43% 12%IB clients* 51% 45% 34%

JPMS Equity Research Coverage 43% 48% 9%IB clients* 70% 61% 53%

*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.morganmarkets.com , contact the primary analyst or your J.P. Morgan representative, or email [email protected].

Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.

Other Disclosures

J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.

Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC's website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf

Legal Entities Disclosures U.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 125 London Wall, London EC2Y 5AJ. South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Licence No: 238066) is a Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited, having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a member of the National Stock Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI Registration Number - INB 010675237/INF 010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MICA (P) 088/04/2012 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities

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and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.

Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. JPMSAL does not issue or distribute this material to "retail clients". The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms "wholesale client" and "retail client" have the meanings given to them in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan, Type II Financial Instruments Firms Association and Japan Securities Investment Advisers Association. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. 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To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules.

General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

"Other Disclosures" last revised April 18, 2012.

Copyright 2012 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P

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