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DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ONTRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS.U.S. Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should beaware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider thisreport as only a single factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION

Client-Driven Solutions, Insights, and Access

27 June 2012

Americas/United States

Equity ResearchConsumer Internet

Facebook, Inc. (FB)INITIATION

A Lot to "Like," But Valuation Looks Full

Event: We initiate coverage of FB with a Neutral rating and a $34 target

price. As the leading social platform, we view FB as well positioned to

capitalize on social media growth. However, valuation appears to account for

a fair amount of this upside, limiting our near-term enthusiasm.

Investment Case:Social media continues to rise in importance, accounting for

17% of U.S. time spent online, versus 10% in 2009, with FB leading the charge.

We believe FBs user scale (~900m MAUs) creates network effect, which is a

competitive advantage. In addition to Metcalfes Law, the source of FBs networkeffect is its user data, particularly individual identity, which is difficult to replicate.

Also, FBs platform is powerful; Facebook Connect provides the ability to

leverage user credentials on sites outside of Facebook for personalization.

This is expanding Facebooks influence across the Web and allows

Facebook to act as a social operating system.

Our proprietary survey of advertisers finds that marketers view FBs

targeting ability as a key differentiator versus competitors, with a majority

generally satisfied with the Facebook ad solution. This provides us with

confidence that ad growth is sustainable for Facebook.

Catalysts:We estimate that FB can sustain 24% CAGR in revenue over the

next five years, with similar EBIT growth, assuming stable margins. Valuation: While we are bullish on FBs prospects, we think current

valuation (23x 13 EV/EBITDA) captures a fair amount of optionality in the

business. Our DCF points to a $34 target price and suggests the market is

embedding in ~$11/share of value from future business opportunities.

Share price performance

25

30

35

May-12

Daily May 21, 2012 -J un 26, 2012, 5/21/12 = US$34.03

Price Indexed S&P 500 INDEX

On 06/26/12 the S&P 500 INDEX closed at 1319.99

Quarterly EPS Q1 Q2 Q3 Q42011A 2012E 0.19 0.11 0.11 0.142013E

Financial and valuation metrics

Year 12/11A 12/12E 12/13E 12/14EEPS (CS adj.) (US$) 0.43 0.48 0.63 0.82Prev. EPS (US$) P/E (x) 77.0 69.5 52.7 40.3P/E rel. (%) 562.2 550.0 469.2 398.6Revenue (US$ m) 3,711.0 4,847.7 6,455.6 8,210.3EBITDA (US$ m) 2,297.0 2,544.2 3,415.0 4,392.5OCFPS (US$) 0.55 0.84 0.98 1.26P/OCF (x) 39.6 33.7 26.3

EV/EBITDA (current) 30.8 27.8 20.7 16.1Net debt (US$ m) -3,510 -9,799 -10,603 -12,120ROIC (%) 83.88 96.66 103.95 134.82

Number of shares (m) 2,138.09 IC (current, US$ m) 1,389.00BV/share (Next Qtr., US$) EV/IC (x) Net debt (Next Qtr., US$ m) Dividend (Next Qtr., US$) Net debt/tot cap (Next Qtr., %) Dividend yield (%)

Source: Company data, Credit Suisse estimates.

Rating NEUTRAL* [V]Price (26 Jun 12, US$) 33.10Target price (US$) 34.0052-week price range 38.37 - 25.87Market cap. (US$ m) 70,770.61Enterprise value (US$ m) 60,971.88*Stock ratings are relative to the relevant country benchmark.

Target price is for 12 months.

[V] = Stock considered volatile (see Disclosure Appendix).

Research Analysts

Spencer Wang

Dean Prissman

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Facebook, Inc.(FB) 2

A Lot to Like, But Valuation LooksFullExecutive Summary

We initiate coverage of Facebook with a Neutral rating and a $34 target price. As the

leading social platform, FB is well positioned to capitalize on growth in social media and

the trend toward real identity/authentic online experiences, and greater user

personalization on the Web. Therefore, we view Facebooks growth prospects as bright

and believe that FB has other monetization opportunities beyond its core first-party

advertising and Credits for social games. However, valuation (23 times 2013 EV/EBITDA)

appears to account for a fair amount of this upside, limiting our near-term enthusiasm.

Investment Thesis

Social Media Growing in Importance

In our view, the future of the Internet will be increasingly about people, connections, and

the context of content we discover, as users continue to transition more of their lives online

and incorporate their real identity in their digital activities. Consequently, social media isrising in importance, accounting for 17% of total time spent online by U.S. Internet users, a

700 bps increase from 2009. In turn, social media now eclipses activities such as e-mail,

gaming, and instant messaging. Facebook, as the largest social platform with over 900m

monthly active users as of 1Q12, is well positioned to capitalize on this trend.

Network Effect Provides Competitive Advantages

We believe that Facebooks user scale creates network effect, which can act as a

competitive advantage and a self-reinforcing virtuous cycle. In addition to Metcalfes Law,

the source of Facebooks network effect is its user data, particularly around individual

identity, which we believe could be leveraged to drive more engagement, and more

monetization opportunities, which, in turn can be reinvested in more features to grow

users. In our opinion, this will be difficult for competitors to replicate.

The Social Operating SystemFacebook Platform

We also like the platform approach Facebook has taken toward social. With the FB

platform, social interactions are no longer limited to activity conducted on a social site (e.g.,

Facebook.com), as Facebook Connect provides the ability to leverage user credentials on

content, applications, and ecommerce sites outside of Facebook for authentication and

personalization. This platform approach is expanding Facebooks influence of social

across the Web, and in our opinion, allows Facebook to act as a social operating system.

Advertiser Survey Says

Facebooks main revenue stream is advertising (~85% of the total). Our proprietary survey

finds that while social advertising is still nascent, marketers view FBs targeting ability as a

key differentiator versus competitors. Therefore, we find that the majority are generally

satisfied with the Facebook ad solution and, in particular, the ability to finely target users.

This provides us with confidence that advertising growth is sustainable for Facebook and

we project a 24% five-year CAGR for ad revenue.

Attractive Financial Model

Combined with our forecasts for its payments business, we estimate that Facebook will be

able to sustain 24% CAGR in revenue over the next five years. Assuming that non-GAAP

EBIT margins remain stable in the low-40% zone, this should translate into similar EBIT

growth. Free cash flow is forecast to grow from an estimated $486 million in 2012 to over

$4.48 billion by 2017.

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Valuation

We are setting a $34 target price for Facebook, based on our DCF model, which assumes

a 10% WACC and 3% terminal growth. Our DCF values Facebooks core business at

~$23 per share, within which we attribute ~$1.50 per share for the NPV of Facebooks

NOL. The balance of our price objective reflects the NPV from blue sky opportunities

related to mobile advertising, a third-party ad network, and expanding payments beyond

social games (collectively ~$11 per share). Our target price implies modest upside fromcurrent levels, implying that a fair amount of optionality is priced into FB shares.

Risks

Key risks to the investment story include Facebooks ability to monetize mobile usage,

which remains early stage, while the long-run effectiveness of social advertising is still also

somewhat unproven. We also note that Facebooks capital structure contains dual class

voting shares with ~56% of Facebooks voting power controlled by founder, chairman, and

CEO Mark Zuckerberg. Given its volume of user data, Facebook is subject to complex and

evolving laws and regulations that pertain to privacy, data protection, and related matters,

which could affect monetization opportunities.

Roadmap to This Report

Friends with Benefits: In this first section, we provide a brief overview of social

media and Facebooks relative positioning in the ecosystem.

The Origins of Network Effect:We delve into the key sources of Facebooks network

effect; Metcalfes Law and data around user identity.

The Facebook Platform: We articulate the strategic benefit from the platform

approach that Facebook has undertaken with respect to social.

Facebook User Growth:We lay out our forecasts for FB user growth over the next

five years and our underlying methodology.

Monetization and the Social OS:We discuss in this section high-level monetization

opportunities for the Facebook platform, assuming continued user growth.

Advertising: We delve into Facebooks main revenue stream and highlight key

conclusions from our proprietary survey of advertisers and also provide our estimates

for Facebook advertising over the next five years.

Payments:We walk through our bottoms-up estimates for payment revenues related

to social games.

Financial Forecasts:We discuss our five-year financial projections for Facebook.

Valuation:We provide a detailed valuation analysis of Facebook, which includes a

valuation of Facebooks core business, the NPV of its NOL, and several blue sky

opportunities.

Investment Risks:We outline the key risk factors to our investment thesis.

Management: In this portion of the report, we provide the background for key

Facebook executives.

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Friends with BenefitsSocial Is a Growing Global Phenomenon

Social media can be defined as the use of Internet-based technologies to enable

communication and interactive dialogue between users. The concept of social networks is

not new and has seen various iterations since the early days of the Web: GeoCities,

Friendster, Myspace, etc. However, in recent years, social networks have evolved into a

growing center of user engagement for content and a platform that is expanding across

the Web for a wide array of activities and applications. For instance, based on third-party

data, as shown in Exhibit 1, in 2011, social media consumed 17% of total time spent

online by U.S. Internet users, a 700 bps increase from 2009. In turn, social media now

eclipses activities such as e-mail, gaming, and instant messaging.

Exhibit 1:% of Minutes Spent Online; U.S. Internet Population, 2009-11*

10%

25%

14%

5% 5%

3%5%

2%

13%

21%

12%

4%6%

4% 4%2%

17%19%

10%

2%

6%5%

4% 2%

0%

5%

10%

15%

20%

25%

30%

SocialMedia

Portals

E-mail

Instant

Messaging

Multimedia

Entertainment

News/Information

OnlineGaming

Sports

%o

fTimeOnline(US)

2009 2010 2011

Source: comScore *Note: This dataset only pertains to desktop minutes, and therefore likely understates

the % of time online for Social Media and Online Gaming.

Social media use is also a global movement. As detailed in the Exhibit 2, we can see that

many countries rival and exceed the United States in terms of hours spent on social media

platforms.

Exhibit 2:Avg. Hours Spent per Month on Social Networking, Across Geographies,

October 2011

11.1 10.710.4 10.29.8

8.7 8.5 8.37.9 7.7 7. 7

7 6.9 6.86. 3 6.3 6.2 6.1 6

5.5

0

1

23

45

67

89

10

11

12

Israel

Argentina

Russia

Turkey

Chile

Philippines

Colombia

Peru

Venezuela

Canada

Mexico

UnitedKingdom

UnitedStates

Norway

Malaysia

Germany

Italy

PuertoRico

Spain

Indonesia

Hours

Spent/Visitor

Source: comScore Media Metrix.

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Within the social media category, Facebook is the clear leader, with ~901 million global

users as of 1Q12, up from 360m in 2009, growth of 150% in two and a quarter years.

Facebooks expansion has also been truly global, with its user base well distributed

throughout all regions in the world.

Exhibit 3:Facebook User Base in Mils, 1Q12 Exhibit 4:Facebook User Base in Mils, 1Q12

360

608

845901

0

100

200

300

400

500

600

700

800

900

1,000

2009 2010 2011 1Q12

FBMonthlyActiveUsers

N. America, 188 ,

21%

Europe , 241 , 26%Asia, 230 , 26%

ROW, 242 , 27%

Source: Company data. Source: Company data.

In total, we estimate Facebooks user base represents over 42% of the worlds Internet

user base. This places Facebooks share of users well ahead of its peers, despite having

essentially no presence in China.

Exhibit 5:Social Media Properties by Users, 1Q12

Number of Users by Social Networking Site, 1Q12

42%33%

14%9% 1%

5%7%7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Facebook Tencent Sina Weibo Twitter LinkedIn Renren Google+ Foursquare

G

lobalPenetration%

901

147

721

20100

300 150200

0

200

400

600

800

1000

Facebook Tencent Sina Weibo Twitter LinkedIn Renren Google+ Foursquare

NumberofUsers

Global Internet User Penetration by Social Networking Site, 1Q12

Source: Company data, Credit Suisse estimates. *Note: (1) For the penetration calculation, we use total global Internet users as opposed to the

addressable users, where we would exclude geographies that are not viable markets. (2) Facebook based on MAU company disclosures. (3)

Twitter based on estimated monthly unique visitors. (4) For Google+, we used comments by the company pertaining to monthly engagement with

Google+ related products.

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The Origins of Network EffectWhile we are not believers in simply big for the sake of being big, we believe that one of

Facebooks competitive advantages is its scale of users, which creates network effect on

multiple different levels. In our opinion, this is a significant advantage against other

competitors and we highlight several sources of Facebooks network effect:

Metcalfes Law;

Identity and User Data;

The Facebook Platform.

Metcalfes Law

First, as stated by Metcalfes law, the value of a network grows proportional to the number

of connected users. The classic example is the telephone system: if there was only one

user of a telephone system, the network is largely useless. However, as the number of

users rises, the value of the network similarly grows and becomes self-reinforcing.

Exhibit 6:Metcalfes Law

IncreaseNumber of

Users

Utility ofNetwork

Increases(Metcalfes Law)


Will the Real You Please Stand Up?

The second source of Facebooks network effect is user data, particularly around

individual identity, which we think could be leveraged to drive more engagement andmonetization, which in turn could be reinvested in more features to grow users.

Exhibit 7:The Second Source of Facebooks Network Effect

Drive More

Engagement

IncreasedRevenue

Opportunity

Invest in MoreFeatures on the

Platform

More User Data

Increase

Number ofUsers

Utility ofNetwork



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More specifically, we think the future of the Internet is and will be increasingly about

people, connections, and the context of content we discover. This will be driven by hard

data centered on three specific concepts:

Real identity;

Social graph;

Open graph.

Unlike some of the early social networks, Facebook is predominantly driven by real name

identity, as opposed to pseudonyms or simple e-mail addresses (profile pages of pets

aside). If users want to be connected to and found by other members on the platform, they

need to be able to find you as a person. In addition, we subscribe to the view that users

likely want authenticity, integrity, and control in their online interactions.

After joining Facebook, users create a detailed profile of their demographic and personal

information, an opt-in choice. On Facebook, users can input their favorite books, music,

movies, as well as relationship status, religious affiliations, and other elements. The more

detailed a user profile, the more value the network receives.

On Facebook, these profile attributes are combined with a users activities (status updates,

posting, commenting, uploading pictures or videos, and the utilization of third-partyapplications). In turn, this establishes a users explicit graph. A users explicit graph is the

deliberate description of ones connections to people, interests, likes, and the collective

activities on the social media platform. This, in turn, is linked directly to ones real name

identity. (Please see Exhibit 8.)

Exhibit 8:Explicit Graph

Gender

URLs

About Me

Movies

TV Shows

Relationship

Emails

Photos

Last Updated

Friends ListSchools

Status Update

Organizations

Music

Family Name

Verified EmailCurrent Location

Display Name

Address

Birthday

Like

Given Name

Check-Ins

ID

User

Gender

URLs

About Me

Movies

TV Shows

Relationship

Emails

Photos

Last Updated

Friends ListSchools

Status Update

Organizations

Music

Family Name

Verified EmailCurrent Location

Display Name

Address

Birthday

Like

Given Name

Check-Ins

ID

User

IDID

User

Source: Credit Suisse.

This data is the source for a secondary or implicit graph.The implicit graph is inferred by

the activities, interests and social connections of the user. Said another way, based on

what a user has described about himself/herself, social media platforms such as Facebook

can interpret this data to derive other areas of interest for each unique user.

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Exhibit 9:Implicit Graph Derived from Explicit Graph and User Activity

Gender Targeted

Visited URLs

Content of About Me

Film Genre, Actors, View

Change in Relationship Status

Photo Location

Implicit Graphs of Social GraphDegree Level

Content and Context of Status Updates

Org Type

Music Artist

Email Platform

Type of Check-Ins

Age Comparison

Possible Like

TV Show Genre

TV Actor

Time of Emails

Subject of Emails

Degree Major, Degree Minor

Photo Contents

Linked URLs

Commented URLs

Network of Show

Music Attributes

Display Name

ID

User

Gender Targeted

Visited URLs

Content of About Me

Film Genre, Actors, View

Change in Relationship Status

Photo Location

Implicit Graphs of Social GraphDegree Level

Content and Context of Status Updates

Org Type

Music Artist

Email Platform

Type of Check-Ins

Age Comparison

Possible Like

TV Show Genre

TV Actor

Time of Emails

Subject of Emails

Degree Major, Degree Minor

Photo Contents

Linked URLs

Commented URLs

Network of Show

Music Attributes

Display Name

ID

User

IDID

User


Next, with real identities, connecting with people on Facebook creates an individualssocial graph, or the global mapping of everybody and how theyre related. The social

graph is comprised of the strong ties established and the weak ties that emerge from

these connections on the social media platform.

Strong ties are close friends, direct business colleagues, or desired individuals to

follow on the platform (in the case of subscriptions). Users find and build connections

on the social media sites with their strong ties first.

Weak ties are the friend of a friend connections that become implicit (implied) with

each new strong tie added to ones network.

A simple social graph is represented below.

Exhibit 10:Simple Social Graph

Friend-Business-Follow

StrongTie

Friend -Business -Follow

Strong Tie

FriendofaFriendIm

plicitConnection

WeakTie


StrongTie


StrongTie


Strong Tie


Strong Tie

FriendofaFriendIm

plicitConnection

WeakTie

FriendofaFriendIm

plicitConnection

WeakTie

Source: Framework from Mark Granovetters Strength of Weak Ties, 1973.

In addition, content (information) posted on Facebook can be distributed across a users

strong ties and weak ties. In turn, Facebook captures the activity of users on the site. We

define these activity streams as users performing actions on particular objects that they

would like to share. In other words, activities on Facebook are done with the express

purpose of sharing them with a users network or a subset of ones network. The social

graph can then share this social object with other members of their respective networks,

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and, in some cases, algorithms exist that share the social object with those in ones weak

tie network, for example, a photo posted by you is liked by someone in your strong tie

network, and in turn this photo may appear on the homepage feed of your friends friend

(weak tie), despite you not being connected with this individual.

Exhibit 11:Activity Stream Framework

Social Object(s)

Buy

Like

Post

Checked-In

Link to

Follow

ID

User

Pics, Link, Video, News,

Social Games, Location,Person, Friend

Social Object(s)

Buy

Like

Post

Checked-In

Link to

Follow

Buy

Like

Post

Checked-In

Link to

Follow

ID

User

IDID

User

Pics, Link, Video, News,

Social Games, Location,Person, Friend

Source: Credit Suisse, Activity Streaming Working Group activitystrea.ms.

Status UpdateGrowing Engagement Drives Activity in the Stream

In turn, these activities have a positive impact on engagement. In other words, active

Facebook users are no longer simply just connecting and communicating with each other.

They are also finding, reading, and watching content. Moreover, users also curate,

comment, share, rate, review, and recommend new content and new products to and from

their network of social connections.

Exhibit 12:In Social Media, User Is the Sum of Identity and Activity Stream

Demographic Info

User

ID

User

ID

Personal Info

Gender

AgeMaritalStatus

EthnicityGender

AgeMaritalStatus

EthnicityGender

AgeMaritalStatus

Ethnicity

Social

GraphLocation

Work Purchases

Social

GraphLocation

Work Purchases

Social

GraphLocation

Work Purchases

UploadedContent

LikesStatus 3rd Party

AppsCross

Platform

Activity Stream

UploadedContent

LikesStatus 3rd Party

AppsCross

Platform

Activity Stream


This notion is supported by data on Facebooks user behavior. As detailed in Exhibit 13,

on average, 25% of Facebook users utilize the Like button for brands and content on a

daily basis, the most frequent activity on the platform. In addition, 22% and 20% comment

on posts and photos, respectively, while 15% of users on average also update their status

each day.

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Exhibit 13:Facebook Activities by % of Daily Users that Engage with Activity

15%

22% 20%25%

11%

0%

10%

20%

30%

40%

50%

Update Status Comment on Posts

(Status, etc.))

Comment on Photos "Like" button for

Content/Brand

Sending Private

Message

Source: Pew Internet Research, 2011.

This also seems consistent with data on users time spent for each section of the

Facebook site. Over one quarter of time is spent on each members Facebook newsfeed;

the central mechanism on Facebook for users to learn, read, and discover news, updates,

and content from their network.

Photos and photo sharing are also extremely important. As seen in the Exhibit 14, photos

account for approximately 17% of time spent on Facebook. According to company data, in

1Q12 on average, 300 million photos were uploaded to Facebook each day. To put this in

context, Pixable, the maker of a photo discovery tool estimated that in the summer of 2011,

Facebooks photo repository was already 3-4 times the combined size of the three nearest

competing offerings. From commenting to uploading, photos form pillar of engagement on

the platform.

Exhibit 14:Share of Time Spent on Facebook by Content Section

27%

21%

17%

10%

25%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Homepage/Newsfeed Profi les Photos Apps and Tools All other

Source: comScore Mediabuilder

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The Facebook PlatformF8 Circa 2007

The third source of Facebooks network effect is the platform approach it has taken toward

social, which we discuss in detail in this section of the report. On May 24, 2007, Facebook

unveiled its F8 platform, which allows third-party developers to seamlessly create and

integrate applications that run on Facebook. As we wrote back in 2007:

In launching this platform, Facebook is adopting an open approach and is evolving its

social network into a platform on which many applications can be developed.

We think the two main implications are that the Facebook platform will:

1. Improve the user experience by offering Facebook members new content and features.

2. Opening Facebook up to basically all developers should accelerate innovation for the

Facebook service.

Expanding Across the Entire Web

Perhaps, an even more radical change is that social interactions are no longer limited to

activity conducted on a social site (e.g., Facebook.com). Facebook has also led the waywith this approach, as Facebook Connect provides the ability to leverage user credentials

(e.g., identity) on content, applications, and ecommerce sites outside of Facebook for

authentication and personalization. This platform approach is expanding Facebooks

influence of social across the Web.

For example, social plug-ins and the use of Facebooks Open Graph protocol create real-

time interactions between content sites and Facebook. If we sign in to websites through

integrated protocols, social becomes the medium for our interactions. Facebook owns the

social activity users perform on third-party sites through social plugins and Open Graph

API. In 2011, third-party data suggested that more than 2.5 million websites had integrated

with Facebook, including 80 of the top 100 websites in the United States. In addition,

10,000 social plugin implementations were being added per day. At the time the company

also stated that over 250 million people were interacting with Facebook on externalwebsites. This data demonstrates the value and role Facebook and social media platforms

play in distribution and interaction.

Exhibit 15:Facebook Extends Beyond Its Platform to the Entire Web

User

SocialPlatform

3rd PartyWebsite

Personal/Social Data


Personalized

Content

Interaction

Usage

Data

Content & Info

from Network

3rd PartyWebsite

UsageData


Interaction

PersonalizedContent


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An ExampleConnected Content in Context

For example, Facebook supports real-name identity and includes an extensive array of

data points to define ones profile. Users opt in to this profile, now known as ones timeline,

and fill out as much as they prefer to disclose. The more information users provide to the

profile, the more information is positioned into the explicit graph and utilized by the social

media platform.

Exhibit 16:Real Name Identity Profile

Source: http://www.facebook.com

In addition, social plugin features offered by Facebook are integrated into third-party sites.

This enables users to easily push content back to their activity stream on Facebook

(similar services exist for Twitter and LinkedIn). Users can do this using a number of

highlighted features; the integrated Like button or the Send to Facebook button are

examples.

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Exhibit 17:Integration of Social Plugins

Facebook LikeButton

Send toFacebook

Tweet This

Source: http://ringtv.craveonline.com/

The Open Graph from Facebook enables developers to integrate social objects that

represent real-world things such as movies, teams, restaurants, etc. into the social graph.

This effectively makes them a page within the Facebook platform. In addition, the content

and experience on a third-party site are more personalized based on elements of a users

social graph.

Exhibit 18:Leveraging Facebook for PersonalizationOpen Graph

Logged In ViaFacebookIdentity

Were using Facebook to personalize your experience

Source: http://www.rottentomatoes.com/

Authenticating through the social media platform and third-party sites allows for social

tools to be distributed across the platform for use; in this case, the Comments capability.

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We highlight several key implications:

Increased Velocity of Virality:The growing connection among social media users is

increasing the velocity of information flow. Therefore, traditional word of mouth has

been significantly augmented. In turn, this has enhanced the distribution or virality of

compelling content and information.

Greater Discovery:With more personal data available, social platforms can improve

existing techniques around recommendations and discovery of content. For instance,Facebook has the EdgeRank algorithm. This algorithm scores content within users

Newsfeed on Facebook to optimize the feed to show users the most pertinent social

objects.

The Virtuous Cycle

In our view, one of the end results of this platform approach is greater engagement for

Facebook, both on its core facebook.com site and also on third-party sites across the

Web. The ratio of daily to monthly active users is one proxy for engagement. On this basis,

57% of global monthly active users were active each day in 2011 (including user

interactions on Facebook through open graph) and this metric has been trending

consistently higher and across geographies for Facebook.

Exhibit 23:Facebook DAU/MAU Ratio, 2009-11

57.1%53.8%

51.4%

64.3%

58.5%

43.6%

53.9%

70.4%

62.4%

49.5% 48.4%

57.2%

46.8%

42.0%46.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

N. America Europe Asia ROW Global

Engagement(DAU/MAURatio

2009 2010 2011


With more engagement comes more monetization opportunities, which, in turn, can be

reinvested in more features to drive more user growth. Additionally, in the case of

Facebook APIs, a larger user base attracts more third-party developers to create

applications, which can also grow engagement and generate more user data. All of this

could theoretically create a virtuous cycle and reinforces Facebooks network effect.

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Exhibit 24:Network Effect in Social Media

Drive MoreEngagementDrive More

Engagement

IncreasedRevenue

Opportunity

Invest in More

Features on thePlatform

More User DataMore User Data

IncreaseNumber of

Users

Utility ofNetwork


Utility ofNetwork


More 3rd

Party AppDevelopers

More 3rd

Party AppDevelopers


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Facebook User GrowthIn light of our view that Facebooks business has significant network effect, we are

confident that the company can continue to increase its user base. In Exhibit 25, looking at

user penetration rates for select a group of countries, we note that in certain geographies

(e.g., Chile, Turkey, and Venezuela), ~85%+ of the Internet population are active monthly

users. In the United States and U.K, the penetration rates are currently around 60%, while

for certain geographies the rates are lower. We note that due to government restrictions,

Internet users in China are not able to access Facebook.

Exhibit 25:Facebook Monthly Active Users (Millions), 1Q12

85% + 85%+ 85%+

~60% ~60% ~60%

35% 35%

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Exhibit 26:CS Est. Facebook MAU Penetration, 2009-2017E

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E

FBMonthlyUserPenetration(%)

N. America

Europe

Asia*

ROW**

Global***

Source: Company Data, ITU, Gartner, Credit Suisse Estimates, note: *Asia excludes China. **ROW

excludes Syria and Iran. ***Global excludes China, Syria, and Iran.

In turn, based on our penetration forecasts, we estimate that Facebooks MAUs will grow

from 845 million at year-end 2011 to 1 billion at year-end 2012, and rise at a 8.5% five-

year CAGR to 1.5 billion MAUs by the end of 2017.

Exhibit 27:CS Est. Facebook MAUs, 2009-2017E

112 154 179201 218 233 245 255 266

117183

229 266296 327

356 383407

62

138212

262301 333

359384

409

69

133

225

279

324353

382411

435

0

200

400

600

800

1,000

1,200

1,400

1,600

2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E

MonthlyAc

tiveUsers(M)

N. America

Europe

Asia

ROW

1.52b1.43b

1.34b

1.25b1.14b

1.01b

845m

608m

360m

Source: Company data, Credit Suisse estimates

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Monetization and the Social OSSome investors may rightly question at this point how Facebook may monetize its

platform? Today, Facebook currently generates revenue from two sources, namely:

Display Advertising: The segment of the online advertising market that Facebook

participates in is known as display advertising. We define display advertising as a form

of online advertising where an advertisers message is shown on a destinationweb/mobile web page, and/or embedded within a mobile web app or online video. The

advertiser pays for space to display a marketing message on one or more of the

pages, videos, or impressions.

Payments: Gaming and the purchasing of virtual goods are popular entertainment

mediums on Facebook. Users pay for gaming features or other virtual goods by

purchasing Facebooks virtual currency, known as Facebook Credits. In many cases,

content is provided by third-party developers, with whom Facebook shares 70% of the

revenue with Facebook retaining the remaining 30%.

However, from a bigger picture perspective, we see multiple opportunities for Facebook to

monetize its platform over time. We draw an analogy with Microsofts Windows business

model. In the traditional PC environment, Microsofts Windows operating system was the

underlying, foundational platform. This platform allowed Microsoft to develop first-party

applications (such as Office), while other software providers created third-party

applications. In this case, Microsoft generates revenues from the sale of the OS and first

party apps, but not from third-party apps.

In contrast, Facebook is free to users, as are most first-party applications (e.g., the photo,

messaging, and groups applications) that are core to the platform. Beyond advertising and

payments from social games, we believe that Facebooks platform could also allow the

company to participate in other verticals such as ecommerce and content sharing. (Please

refer to the Exhibit 28.)

Exhibit 28:Dominant Social Media Platform Can Enable Multiple Ways to Monetize


For the purposes of our work, we now detail the outlook for Facebooks known revenue

streams: advertising and payments, while we discuss blue sky opportunities for future

monetization in the valuation discussion of this report.

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AdvertisingSurvey Says

We begin our analysis of Facebooks revenue growth with advertising, which accounts for

the lions share of the companys total revenue base (85% of the total in 2011). In order to

assess the potential for this revenue stream, we conducted primary market research,

which includes a survey of 100 Facebook advertising buyers (please see the appendix for

a detailed profile of the respondent pool). Based on this work, we conclude:

Social advertising is still in its infancy.

Marketers primary objective is brand awareness.

The Facebook ad solution is differentiated in its ability to finely target users.

Advertisers satisfaction level is relatively high with Facebook

and they plan to increase their ad spending on Facebook.

(1) Social Advertising Still in Its Infancy

Although Facebook has accepted advertising since its early days, we submit that the

concept of social advertising is still nascent. One testament to this idea is the numerous

number of metrics that are measured by advertisers. As detailed in Exhibit 29, there does

not appear to be any one, singular measure of success for social advertising.

In measuring the success of their campaigns, ad buyers consider many metrics to be

important, as shown in Exhibit 29. In our view, the sheer number of metrics where more

than 80% of respondents said that the metric is important, is a testament to the complex

and ambiguous nature of measuring success with brand/awareness advertising.

Exhibit 29:Buyers Are Focused on Many Success Metrics

74%

86%

87%

88%

89%

89%

90%

91%

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

Number of advertising impressions

Click through rates resulting in traffic to Fan Page/Timeline

Brand awareness lift

Total number of visits to fan page, or similar metric

Click through rates resulting in Direct Website Traffic

Number of new fan's signed up, or similar metric

Changes in the intent to purchase

Transaction/ROI m etrics related to conversion e.g revenue generated

per dollar spent

Q: Are the following metrics important in determining the success of your advertising on

Facebook? (Charts reflect responses where answer selected was somewhat important, important and very important)

Source: Credit Suisse 2012 Facebook Advertising Buyer Survey.

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(2) Brand Awareness Is the Primary Objective

Next, with no clear cut singular success metric, we examine the objectives of advertisers

who market on Facebook. As shown in Exhibit 30, Facebook advertisers frequently have

many objectives for their campaigns, although creating and increasing brand awareness

tops the list, with 92% of respondents citing this objective, while generating engagement

follows closely at 90%.

Exhibit 30:FB Ad Campaigns Appear to Have Many Objectives

70%

73%

75%

81%

83%

90%

92%

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

Generate other social media activity

Complement other media buys such as TV, Print, Online Search, Display

Generate future leads

Increase number of fans

Drive transactions, similar to search advertising/performance oriented

display advertising

Generate engagement with your end consumer

Create/increase awareness of product/brand/service

Q: How frequently do your paid facebook advertising campaigns encompass the following

objectives? (Charts reflect responses where answer selected was somewhat frequently, frequently and very frequently)


Here, we submit that debate over the ROI or conversion potential of Facebook advertising

may be somewhat misplaced. Said another way, not all advertising has the singular focus

of generating immediate revenue. For example, much of the advertising on television or inprint falls into this category, in which the underlying goal of the advertiser is to create

awareness with as many potential customers as possible. While the buyer may elect to

purchase in short-order too, in reality, much of this advertising is spent on the notion that

buying will occur further in the future. Similarly, this type of advertising also lends itself to

situations in which the goal of the brand is to maintain mindshare with current customers.

This is in contrast to performance or transactional advertising, in which the main objective

is to drive traffic, where, within a short time period, a sale or revenue event such as a paid

subscription is consummated. The sale is immediately attributed back to the

advertisement, and therefore a return on investment can be calculated. By and large, this

measurement is straightforward and objective. Much of the online advertising spent in

search falls within this bucket, as search terms serve as a strong signal to advertisers that

a user is seeking to buy something. This is the reason that a majority of the online

advertising spent by ecommerce retailers and online travel agencies falls within this

bucket.

(3) Facebooks Targeting Ability Is Strong

A key point of differentiation in Facebooks advertising solution is the power of its targeting

capability. As shown in Exhibit 31 and Exhibit 32, 87% of respondents highlighted this

targeting capability as an important factor in their decision to advertise with Facebook.

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Exhibit 31:Targeting Is a Key Factor in Decision to Advertise

Very Important, 56%

Important , 31%

Neutral, 12%Not Important, 1%

Q: In your decision to advertise with Facebook, how important is Facebook'sability to target advertisements to users based on parameters such as location,likes interests and topics, demographics, user events, actions, fans and friends

of fans


Similarly, as we depict in Exhibit 32, this targeting capability is generally perceived asmore effective that what is available from other display advertising players. This is due to

Facebooks bevy of data around individuals from the explicit graph. With this data,

marketers can target users based on many different criteria such as location, age,

occupation, education, interests, marital status, etc.

Exhibit 32:Facebook Targeting Perceived as Superior to Other Channels

20%

14%10% 11% 9%

12%14%

30% 31%27%

32%

46%

39%38%

50%

55%

63%

57%

45%49% 48%

0%

10%

20%

30%

40%

50%

60%

70%

Google Display Yahoo Display AOL Display IAC Display Other Ad

Networks

Other Ad

Exchanges

Demand Side

Platforms

%o

fRespond

ents

FB is less effective About the same FB is more effective

Q: Do you believe Facebook's targeting abilities are more effective in helping you reach youraudience as compared to the following players/channels?


We also note that Facebook recently released a set of new targeting features known as

the Open Graph Action Targeting Spec, in which advertisers can target users based on

particular actions they performed on the site. For example a user can be targeted based

on listing to a song in an app such as through Spotify, or updating their status with verbs

and objects just drank a cup of coffee, where the verb drank and object coffee are

targeting parameters. While these targeting features are very new, with only 33% of

respondents in our survey indicating that they had used them, the level of receptivity to the

features appears high. As depicted in the bottom right chart in Exhibit 33, when asked if

they believe if these features will eventually lead to an increase in ad spend, 55% of

respondents indicated increase somewhat, while 27% said increase substantially.

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Exhibit 33:Buyers Also Seem Receptive to Newer Targeting Initiatives

Not Sure, 15%

No, 52%

Yes, 33%

Q: Do you be lieve that the Open Graph Action Spec

Targeting capability, will eventually lead to youincreasing your Facebook ad Spend?

27%

55%

12%6%

0%

10%

20%

30%

40%

50%

60%

Increase

substantially

Increase somewhat No Not Sure

Q: Have you used the Open Graph Action Spec targeting

capability with your Facebook Ads? For example: targetingindividuals whom: indicated they listened to a particular song,drank a particular soft drink etc.?


Over and above targeting capabilities, we believe a unique and powerful proposition that

Facebook offers is the capability to enhance advertising with social context. In this regard,

advertisers are able to highlight alongside their ads if your friends have liked the business

or brand. This is important as it is generally accepted that endorsements from ones strong

ties have a greater impact on ones purchase decisions than a strangers endorsements,

and the perceived credibility of an ad/business is greater if someone in your immediate

network vouches for it. Effectively, Facebook, with social ads, is delivering word of mouth,

at scale.

According to Facebooks analysis, ads of this nature demonstrated a greater than 50%

increase in ad recall versus ads without social context. On a similar note, third-party data

indicates that click through rates have increased 50% over the past 12 months, in part due

to socially-enabled ads. Despite the potential benefits, we estimate that only~20% of ads at the moment have a social component. In turn, this implies that there may

be further upside to Facebook advertising revenue as social ads grow as a percentage of

the total and assuming these ad continue to deliver better results for marketers.

(4) Advertiser Satisfaction Is Relatively High with FB

When asked to rate the degree to which Facebook is successful in driving key

performance metrics, the results were largely positive. Notably, on average 35-40% were

satisfied/very satisfied, while ~40% of respondents were somewhat satisfied with the

Facebook advertising solution.

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Exhibit 34:Varying Degrees of Satisfaction Exist

10%

20%

12%

15%

16%

32%

28%

19%

38%

46%

53%

42%

42%

42%

51%

48%

36%

28%

29%

34%

35%

21%

17%

24%

16%

6%

6%

9%

7%

5%

4%

9%

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

Number of impressions

Click through rates to product/brand/service website

Click through r ates to product/brand/ service Fan Page/Timeline

Number of new fan's signed up, or similar metric

Number of visits to fan page, or similar metric

Transaction/ROI m etrics related to conversion e.g r evenue generated

per dollar spent

Changes in the intent to p urchase

Brand awareness lift

Not Satisfied Somew hat Satisfied Satisfied Very Satis fied

Q: Are you satisfied with Facebook advertising's ability to drive the following?


(5) Ad Spending on FB Expected to Increase

In addition, based on our survey, the good news is that 56% of respondents indicated they

would increase their spend on Facebook advertising over the next 12 months. As shown in

Exhibit 35, on a weighted-average basis, this increase equated to 20%. We note however,

that our survey did not include advertisers that do not currently advertise with Facebook.

Exhibit 35:Respondents % Budget Change Over Next 12 Months

13%

28%

32%

10% 9%

4%

1%

0%

5%

10%

15%

20%

25%

30%

35%

Decrease No Change Increase 1-10% Increase 11-25% Increase 26-50% Increase 50-100%

> 100% Increase

%o

fTotal

Weighted AveIncrease = 20%

Weighted AveDecrease = 10%*

Source: Credit Suisse 2012 Facebook Advertising Buyer Survey *Note: 2 out of the 13 respondents said

their spend would decrease by 51-100%, excluding these, the weighted average decrease equates to -7%.

For buyers that indicated that they would increase their spend, 30% indicated that the

increase would be funded by shifting dollars from other channels, 27% indicated the

budget would be incremental, while the remaining 43% said that the increase would be

funded by both incremental budget and other channels. In terms of which channels

budgets would be moved from, as shown in Exhibit 36, respondents indicated that the

shifts would be fairly broad-based. Of particular note on the offline side, 44% of

respondents indicated a shift from print advertising, and for online, 37% and 41%

respectively, indicated a shift from online portals and ad networks/exchanges.

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Exhibit 36:Budgets Increases Both Incremental and From Other Channels

Total budget size

will increase

27%

Move budget fromother advertising

channels30%

Both options areapplicable

43%

Q: To accommodate this increase in spend on Facebook, please select how you will fundyour incremental Facebook spend.

32%

44%

24%

32%

37%41%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

TV Print Radio Online Paid Search Online Portal such

as a Yahoo and

AOL

Other online

display (ad

networks & ad

exchanges)

From which Channel?


Advertising Revenue Forecast

Net net, our survey suggests that Facebook should be able to sustain growth in its

advertising revenue stream. To first size the market, we estimate that the global

advertising market in 2012 will equate to $531 billion, with $82 billion being spent online.

However, as we outlined earlier, Facebooks advertising falls within the display advertising

market, which we forecast will be $24 billion for the year.

Exhibit 37:CS Est. Facebook TAM, 2012E

$449

$82 $58 $24

$531

$0

$100

$200

$300

$400

$500

$600

Global Advertising Global Offine

Advertising

Global Online

Advertising

Global Non-Display

Online Advertising

Global Online

Display Advertising

$'sinBils.

Source: Company data, Credit Suisse estimates, Magna Global.

Over the next five years, as highlighted in Exhibit 38, we project that the global advertising

market will grow at a 4.4% CAGR to $660 billion by 2017. As for the online portion, we

estimate that the online advertising market will grow by at an 11% five-year CAGR to $138

billion by 2017, and that the display advertising market will grow in-line with the total online

market and be $52 billion by 2017.

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Exhibit 38:CS Est. Facebook TAM, 2009-2017E

$0

$100

$200

$300

$400

$500

$600

$700

2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E

$'sinB

ils.

Total

Advertising

Online

Adv.

Online

Display

Source: Company data, Credit Suisse estimates, Magna Global

From a modeling standpoint, we project Facebooks advertising revenue using a

bottoms-up approach, based on the following underlying business drivers:

Average Monthly Active Users: Refers to the average number of monthly active

users on Facebook we forecast previously. We project a five-year CAGR of 9.6%

through 2017.

Daily Advertising Impressions Per MAU: Refers to the average number of

advertising impressions each monthly active user is exposed to per day. This metric is

a function of the number of pages viewed by each MAU, and the number of

advertisements displayed per page. We anticipate that user engagement (page views)

will continue to grow moderately, and in turn estimate that on average each MAU will

be displayed 61 impressions per day in 2012 and that this figure will rise at a 6% five-

year CAGR to 81 impressions per day by 2017.

Average Price per 000 Ads: Commonly referred to as CPM (Cost per 1,000

Impressions). We anticipate that over time, given improvements in targeting/relevancy,measurement and analytics, and ad-buying tools, Facebook should be able to drive

pricing up moderately. In turn, we forecast that CPM will rise from $0.20 in 2012 to

$0.27 by 2017, a 7% five-year CAGR.

Exhibit 39:CS Est. Facebook Advertising Drivers and Revenue Forecast

User Growth

From higher

engagement

From

improved

relevancy

CAGR

2010 2011 2012E 2013E 2014E 2015E 2016E 2017E 12-'17

Avg. MAU's 487 736 934 1,074 1,193 1,294 1,387 1,475 9.6%

x Daily Ad Impressions per MAU 62 58 61 67 70 73 77 81 6.0%

x 365 Days 365 365 365 365 365 365 365 365 0.0%

/ 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 0.0%

= Annual Ad Impressions ('000's) 11,000 15,500 20,645 26,116 30,445 34,684 39,044 43,591 16.1%

x Avg. Price per '000 Ads $0.17 $0.20 $0.19 $0.20 $0.22 $0.24 $0.25 $0.27 6.9%

= Advertising Revenue ( Mils.) $1,869 $3,154 $3,936 $5,259 $6,706 $8,246 $9,858 $11,621 24.2%

Y/Y % Change

Avg. MAU's 51% 27% 15% 11% 8% 7% 6%

Daily Ad Impressions per MAU -7% 5% 10% 5% 5% 5% 5%

Annual Ad Impressions ('000's) 41% 33% 27% 17% 14% 13% 12%

Avg. Price per '000 Ads 20% -6% 6% 9% 8% 6% 6%

Advertising Revenue ( Mils.) 69% 25% 34% 28% 23% 20% 18%


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Putting together these drivers, we project that Facebooks advertising revenue for 2012

will be $3.94 billion and rise to $11.62 billion by 2017, a 24% five-year CAGR. Looking at

our revenue build another way, as shown in Exhibit 40, we project for 2012 that Facebook

will generate $0.35 in advertising revenue per MAU per month, and that this figure will rise

at a 13.3% five-year CAGR to $0.66 by 2017.

Exhibit 40:CS Est. Facebook Advertising Revenue ForecastImplied Rev. per MAU per Month

CAGR2010 2011 2012E 2013E 2014E 2015E 2016E 2017E 12-'17

Advertising

Average MAU's 487 736 934 1,074 1,193 1,294 1,387 1,475 9.6%

x Advertising per MAU per Month $0.32 $0.36 $0.35 $0.41 $0.47 $0.53 $0.59 $0.66 13.3%

x Months per Period 12 12 12 12 12 12 12 12 0.0%

= Advertising Revenue $1,869 $3,154 $3,936 $5,259 $6,706 $8,246 $9,858 $11,621 24.2%

Y/Y % Growth

Average MAU's 95.7% 51.2% 26.9% 15.0% 11.0% 8.5% 7.2% 6.3%

Advertising per MAU per Month 25.0% 11.6% -1.6% 16.2% 14.9% 13.3% 11.5% 10.9%

Advertising Revenue 144.6% 68.8% 24.8% 33.6% 27.5% 23.0% 19.5% 17.9%


This in turn implies that Facebooks share of the Online Display market will rise from

11.4% in 2012 to 22% by 2017. However, as a proportion of the total online advertising

market, our projections imply that Facebook will still however only hold 8.4% of the market

by 2017.

Exhibit 41:Facebook Advertising Market Share, 2009-2017E

0.4%0.6% 0.7%

0.9% 1.1% 1.4% 1.6%1.8%1.4%

2.9%

4.3% 4.8%5.7%

6.6%7.3% 7.9%

8.4%

3.7%

7.4%

11.4%12.7%

15.2%

17.5%

19.4%

20.9%22.2%

0%

5%

10%

15%

20%

25%

2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E

FBGlobalMarketSh

are

OnlineDisplay

Online Adv.

TotalAdvertising


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PaymentsTo forecast Facebooks payments business related to social games, we follow a similar

bottoms approach based on the following business drivers:

Average Monthly Active Users: We use the same monthly active user count as our

advertising revenue forecast.

Percentage of Users Who Purchased Through Facebook: This refers to the

proportion of users in a given year that purchased items using Facebook credits.

Based on company disclosures, 1% and 2% purchased Credits in 2010 and 2011

respectively. For forecasting purposes, we assume this metric is flat in 2012, and rises

at 100 bps per year from 2013 through 2017. In turn, this implies that 19 million users

will purchase Facebook Credits in 2012, and that this figure will rise at a 40% five-year

CAGR to 104 million by 2017.

Gross Payments per Payment User: This variable equates to the annual amount of

purchases per user. We note that in 2012 this metric will be artificially high as it will

include one extra month of payment revenue recognition in 3Q12. Given substantial

growth in the number of new payments users we forecast, we anticipate that this metric

will normalize at a lower average as newer users are likely to be less enthusiastic than

old ones. Therefore, we project that gross payments per payments user will decline

from $160 in 2012, to $88 by 2017, an -11% compound annual decease.

By multiplying the number of users who purchased credits through Facebook with the

gross payments per payment user, we derive total transaction volume. Total

transaction volume refers to the total value of items paid for with Facebook credits in a

given year.

Facebook Share Percentage:We however note that Facebook only books its portion

of the total transaction volume as revenue. At this stage, ~70% of the transaction

volume is paid to third-party developers that use the virtual currency (e.g., Zygna),

while Facebook retains ~30% as revenue. In turn, we model that Facebooks share of

30% will hold through 2017.

Exhibit 42:Facebook Payments Revenue, 2010-2017ECAGR

2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 12-'17

Avg. MAU's 487 736 934 1,074 1,193 1,294 1,387 1,475 9.6%

x % Users Who Purchased Through FB 1.0% 2.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 28.1%

= Users Who Purchased Through FB 5 15 19 33 48 65 84 104 40.4%

x Gross Payments per Payment User $70 $131 $160 $122 $104 $95 $90 $88 -11.3%

= Total FB Transaction Volume $352 $1,965 $3,038 $3,989 $5,013 $6,184 $7,524 $9,095 24.5%

x Facebook Share (%) 30% 28.3% 30% 30% 30% 30% 30% 30% 0.0%

= Payments & Other Fees Revenue $106 $557 $911 $1,197 $1,504 $1,855 $2,257 $2,729 24.5%

memo: Paid Out to Developers $246 $1,408 $2,127 $2,793 $3,509 $4,329 $5,267 $6,367 24.5%

Y/Y % Change

Avg. MAU's --- 51.2% 26.9% 15.0% 11.0% 8.5% 7.2% 6.3%% Users Who Purchased Through FB --- 98.4% 0.0% 49.1% 32.9% 24.8% 19.9% 16.6%

Users Who Purchased Through FB --- 200.0% 26.9% 71.5% 47.6% 35.4% 28.5% 23.9%

Gross Payments per Payment User --- 86.3% 21.9% -23.4% -14.9% -8.9% -5.3% -2.5%

Total FB Transaction Volume --- 458.8% 54.6% 31.3% 25.7% 23.4% 21.7% 20.9%

Facebook Share (%) --- -5.5% 5.8% 0.0% 0.0% 0.0% 0.0% 0.0%

Payments & Other Fees Revenue --- 428.0% 63.6% 31.3% 25.7% 23.4% 21.7% 20.9%

memo: Paid Out to Developers --- 472.0% 51.0% 31.3% 25.7% 23.4% 21.7% 20.9%


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Putting together these drivers, we project that Facebooks payments revenue for 2012 will

be $911 million, and could rise to $2.73 billion by 2017, a 24.5% five-year CAGR. Based

on our projection for 18-21% growth rates in the virtual goods market, we forecast that

Facebooks share will rise from ~30% in 2012 to 39% by 2017.

Exhibit 43:Facebook Share of Virtual Goods Market, 2011E-2017E

23.2%

29.6%32.2%

33.4%34.9%

36.6% 38.9%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2011E 2012E 2013E 2014E 2015E 2016E 2017E

FBShareofMarketforVirtualGoods


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Financial ForecastsTotal Revenue

Combining our revenue estimates for Facebooks advertising and payments businesses,

we forecast total revenue of $4.85 billion in 2012, up 31% year over year. We estimate

that over the next five years, total revenue will grow at a 24.2% compounded annual

growth rate, equating to $14.35 billion by 2017.

Exhibit 44:CS Est. Facebook Revenue Forecast, 2009-2017E

$777

$1,974

$3,711$4,848

$6,456

$8,210

$10,102

$12,115

$14,349

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E

Rev

enue$M


Expense Forecast

Facebook allocates its operating expenses across four line items, as outlined in Exhibit 45.We note that expenses associated with employee compensation and benefits compose a

significant share of each item.

Exhibit 45:Facebook Expense Line Items

Expense Components

Cost of Revenue Expenses associated with delivery and distribution of products: such as data

center operations, energy and bandwidth, support and maintenance; includes

all employee salaries and benefits associated with performing these functions.

Embedded within this line are all credit card and transaction fees.

Marketing & Sales Primarily consists of salaries and benefits for employees in sales, sales

support, marketing, business development and customer services functions.

Marketing and promotional expenditures are also allocated to this line.

Research &

Development

Primarily consists of salaries and benefits for employees on engineering and

technical teams who are responsible for building new products and improving

existing ones.

General &

Administrative

Primarily consists of salaries and benefits for executives as well employees

within finance, legal and human resource functions. Expenses associated with

outside consulting, legal, accounting, facilities and 3rd party support costs are

allocated to this line.


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EBIT

In terms of forecasting opex on a going forward basis we assume that for 2012, across the

board, expenses as a percentage of revenue for each line item will be up year on year as

the company continues to invest to grow its business. On this basis, for 2012 we model a

non-GAAP EBIT margin of 42.4% versus 53.2% in 2011. Beyond 2012, we hold our

expense line forecasts as a percent of revenue at roughly flat, as we believe that enough

leverage exists in the model to maintain room for continued investment. For example in2013, we model operating expenses x-SBC of $3.69 billion versus $2.8 billion in 2012, a

32% increase.

Exhibit 46:Facebook Operating Expenses x-SBC, 2010-2017E

25%23%

26% 27% 27% 27% 27% 27%

14%14%14%14%14%14%

10%9%

7% 7%9% 9% 9% 9% 9% 9%

6% 6%7% 7% 7% 7% 7%7%

0%

5%

10%

15%

20%

25%

30%

2010 2011 2012E 2013E 2014E 2015E 2016E 2017E

%ofRevenue

Cost of Rev.

Marketing &

SalesR&D

G&A


In turn, as shown in Exhibit 47we forecast that non-GAAP EBIT margin will equate to

~42-44% on a forward-looking basis, with non-GAAP EBIT rising from $2.1 billion in 2012

to $6.2 in 2017, a 25% five-year CAGR.

Exhibit 47:Facebook Non-GAAP EBIT, 2010-2017E

CAGR

2010 2011 2012E 2013E 2014E 2015E 2016E 2017E 12-'17

Non-GAAP EBIT Calculation

GAAP Operating Income $1,033 $1,757 $478 $1,950 $2,529 $3,111 $3,731 $4,420 56.1%

+ Total SBC $20 $217 $578 $820 $1,043 $1,283 $1,539 $1,822 25.8%

+ Other $0 $0 $1,000 $0 $0 $0 $0 $0 -100.0%

= Non-GAAP EBIT $1,053 $1,974 $2,055 $2,769 $3,571 $4,394 $5,270 $6,242 24.9%

Non-GAAP EBIT Margin 53.3% 53.2% 42.4% 42.9% 43.5% 43.5% 43.5% 43.5%

Y/Y % Growth 264.4% 87.5% 4.1% 34.7% 29.0% 23.0% 19.9% 18.4%

Source: Company data, Credit Suisse estimates

To put our Facebook margin estimates in context, we compare it with Google, which within

our coverage universe we believe is the most similar in terms of cost structure. In our

opinion, the best margin metric for an apples to apples comparison is Googles non-GAAP

EBIT margin as a percentage of net revenue, which only considers revenue that Google

ultimately keeps versus revenue which is paid out to third parties such as publishers and

distribution partners. On the heels of a large year for reinvesting in the business, where

headcount increased by 33%, in 2011, Googles non-GAAP EBIT margin as a % of net

revenue was 49% versus 53.4% in 2010. On a going-forward basis, we model this margin

for Google at roughly flat around 48% versus our 42-44% long-term estimate for Facebook.

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Exhibit 48:Facebook non-GAAP EBIT and Margin, 2010-2017E

$1,053

$1,974 $2,055

$2,769

$3,571

$4,394

$5,270

$6,24253% 53%

42% 43% 44% 44% 44%44%

0%

10%

20%

30%

40%

50%

60%

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

2010 2011 2012E 2013E 2014E 2015E 2016E 2017E

Non-GAAP

EBITMargin

Non-GAAPEBIT


Free Cash Flow

In terms of free cash flow, we project that in 2012 Facebook will generate positive FCF of

$486 million versus $943 million in 2011 (excluding PP&E purchased under capital

leases). On this basis, we forecast that FCF will rise at a 56% compound annual rate over

the coming five years, totaling $964 million in 2013 and approaching $4.48 billion by 2017,

driven by our revenue forecast and stable margins. Beyond these operating factors, our

FCF projections reflect capex of $1.65 billion for 2012, with a 4% five-year CAGR through

2017. Our FCF calculation methodology is consistent with how we calculate the metric for

all companies within our coverage universe. However, as shown in Exhibit 49, Facebook

calculates FCF after PP&E acquired under capital leases.

Exhibit 49:Facebook Free Cash Flow Forecast, 2011-2017E

2011 2012E 2013E 2014E 2015E 2016E 2017E

FCF Calculation

Net Cash Provided by Operating Activities $1,549 $2,134 $2,604 $3,407 $4,275 $5,356 $6,476

- Purchases of PP&E ($606) ($1,648) ($1,640) ($1,722) ($1,809) ($1,899) ($1,994)

- Property & Equipment Acquired Under Capital Leases ($473) ($152) ($160) ($168) ($176) ($185) ($194)

= FCF (FB Definition) $470 $334 $804 $1,517 $2,290 $3,272 $4,288

+ Property & Equipment Acquired Under Capital Leases $473 $152 $160 $168 $176 $185 $194

= Traditional FCF $943 $486 $964 $1,684 $2,466 $3,457 $4,482


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ValuationFramework

Now that we developed financial forecasts for Facebooks base business, in this section

we lay out our valuation analysis, based on the framework depicted in Exhibit 50.

Exhibit 50:Facebook Value Framework

+ NPV of NOL

= Equity Value for Base Business

+ NPV of Ad Network Opportunity

+ NPV of Mobile Advertising Opportunity

+ NPV of Expanded Payments Opportunity

= Equity Value For Base Business + Future Opportunities

+ Net Cash

DCF Derived NPV For Base Business

+ NPV of NOL

= Equity Value for Base Business

+ NPV of Ad Network Opportunity

+ NPV of Mobile Advertising Opportunity

+ NPV of Expanded Payments Opportunity

= Equity Value For Base Business + Future Opportunities

+ Net Cash

DCF Derived NPV For Base Business


In terms of valuation technique, we are traditionalists and rely on discounted cash flow

(DCF) analysis. While we acknowledge some of the shortcomings of DCF (reliability of

long-term forecasts, sensitivity to WACC and terminal growth assumptions), we generally

prefer measures of intrinsic value, as opposed to relative value, and ones that capture the

long-term evolution of business models. We apply the same WACC and terminal growth

assumptions in our valuation of the base business and incremental opportunities.

WACC

Calculating a weighted average cost of capital for Facebook is challenging, owing to the

limited trading history of the company. For our DCF model, we utilize a discount rate of

10%, which assumes:

A risk-free rate of 2%;

An equity-risk premium of 6.5%;

A beta of 1.2, which represents the average beta of Facebooks peers.

Terminal Growth

We utilize a 3% terminal growth rate in unlevered free cash flow. This assumes perpetual

growth is similar to long-term, nominal economic growth and is consistent with our

assumptions for our universe of Internet stocks.

Blue Sky Opportunities

Facebook is currently trading at an EV/EBITDA multiple of roughly 23 or a P/E multiple of

53, based on our 2013 forecasts. To us, this valuation clearly captures the expectation that

Facebook will be able to find other ways to monetize its platform beyond first-party display

advertising and payments related to its social games. While we consider monetization for

Facebook as fairly open-ended, we can envision three opportunities:

Mobile advertising

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Third-party ad network

Expanding payments beyond social games

(1) Mobile Monetization

While mobile is clearly a risk for Facebook, it is also a large opportunity too. As shown in

Exhibit 51, in 1Q12, 54% or 488 million of Facebooks 901 MAUs accessed Facebook

from a mobile device. Based on our calculations, we estimate that 9% of total MAUs or 83million were mobile only users, and the remaining 45% or 405 million accessed Facebook

from both a mobile device and desktop.

Exhibit 51:Facebook Mobile MAUs vs. Web Only, 1Q12

405

83

413

901

488

0

100

200

300

400

500

600

700

800

900

1,000

Implied Mobile + Web

Users MAU's

Mobile ONLY MAU's Total Mobile MAU's Web Only Tota l MAU's

MixofFBMAU's(1Q12)

45% of

Total

9% of

Total

54% of

Total

46% of

Total


Facebooks challenge has been that it has historically not monetized mobile usage. Thecompany debuted its first mobile advertising offering at the end of February 2012, and up

until recently this offering had not been rolled out at scale. On this basis, our total

company financial estimates laid out previously do include embedded forecasts for

Facebooks mobile advertising opportunity. We forecast this option separately, as shown

in Exhibit 52, using the following methodology:

First, we assume that the ratio of Mobile MAUs to total MAUs continues to rise at a

similar trajectory, from 57% in 2012 to 93% by 2016. This implies that Mobile MAUs will

rise from 533 million in 2012 to 1.36 billion by 2017, a 21% five-year CAGR.

In 2012, we assume that each Mobile MAU is exposed to four add impressions per

day. This compares to the 61 average daily ad impression exposures we forecast in

the year for desktop MAUs. Given increased levels of mobile engagement and

innovation in terms of mobile ad-units, we estimate that Daily Ad Impressions per

Mobile MAU rise at a 44% five-year CAGR to 25 by 2017; this compares with our

estimate of 81 ad impressions per desktop MAU for 2017.

For pricing, in 2012, we assume a $0.06 CPM versus $0.20 for desktop. We believe

that as mobile commerce and the mobile economy begin to mature, the gap in CPM

will close. Therefore, we forecast that Facebooks mobile CPM could rise at a 30%

five-year CAGR to $0.21 by 2017, which compares with the $0.27 CPM we forecast for

desktop in 2017.

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Combining these variables, we estimate $44.5 million in mobile advertising revenue

within 2012, which based on our assumptions rises to $2.66 billion by 2017, a

120%-plus five-year CAGR.

To project potential EBIT, on the basis that not all operating costs associated with the

opportunity are incremental, we assume a 60% non-GAAP EBIT margin.

Exhibit 52:Facebook Mobile Advertising Opportunity, 2012-2017E

CAGR2012E 2013E 2014E 2015E 2016E 2017E 12-'17

Total Avg. MAU's 934 1,074 1,193 1,294 1,387 1,475 9.6%

x Mobile MAU/Total MAU Ratio (%) 57% 66% 74% 81% 88% 93% 10.2%

= Mobile Monthly Active Users 533 712 882 1,053 1,215 1,366 20.7%

x Daily Ad Impressions per Avg. Monetized MAU 4 8 12 16 20 25 44.3%

x Days per Period 365 365 365 365 365 365 0.0%

/ 1,000 1,000 1,000 1,000 1,000 1,000 1,000 0.0%

= Total Impressions (Bils.) 778 2,078 3,861 6,151 8,870 12,461 74.1%

x Avg. Price per '000 Ads (Mobile) $0.06 $0.08 $0.11 $0.14 $0.18 $0.21 30.1%

= Mobile Advertising $44.5 $167.4 $425.3 $877.4 $1,567.6 $2,657.5 126.6%

x Non-GAAP EBIT Margin 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 0.0%

= Mobile Advertising Non-GAAP EBIT $26.7 $100.4 $255.2 $526.4 $940.6 $1,594.5 126.6%

Y/Y % Growth

Mobile-ONLY /MAU Ratio (%) 55.3% 33.5% 23.9% 19.5% 15.4% 12.4%

Daily Ad Impressions per Avg. Monetized MAU 100.0% 100.0% 50.0% 33.3% 25.0% 25.0%

Days per Period 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Total Impressions (Bils.) 210.6% 167.1% 85.8% 59.3% 44.2% 40.5%

Avg. Price per '000 Ads (Mobile) 43.0% 40.8% 36.7% 29.5% 23.9% 20.7%

Mobile Advertising 344.2% 276.1% 154.1% 106.3% 78.7% 69.5%

Non-GAAP EBIT Margin 37.9% 0.0% 0.0% 0.0% 0.0% 0.0%

Mobile Advertising Non-GAAP EBIT 512.6% 276.1% 154.1% 106.3% 78.7% 69.5%

FB Share of Mobile AdvertisingFacebook Mobile Advertising $44 $167 $425 $877 $1,568 $2,657 126.6%

/ Global Online Mobile Display Advertising $1,952 $2,679 $3,630 $4,457 $5,271 $6,256 26.2%

= FB Market Share 2.3% 6.2% 11.7% 19.7% 29.7% 42.5% 79.5% Source: Company data, Credit Suisse estimates.

We estimate the net present value of the mobile advertising opportunity by developing and

discounting the cash flow estimates generated from our EBIT projections. In terms of key

assumptions, we assume a tax rate in each year that is consistent with our company-wide

model, a 10% discount rate, and a 3% perpetual growth rate. Based on these assumptions

we estimate Facebooks mobile advertising opportunity to be worth $12.3 billion in

enterprise value or $4.49 per share.

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Exhibit 53:NPV of Facebook Mobile Advertising Opportunity

2012E 2013E 2014E 2015E 2016E 2017E

NPV of Mobile Advertising Opportunity

Facebook Global Mobile Revenues $44 $167 $425 $877 $1,568 $2,657

x EBIT Margin 60.0% 60.0% 60.0% 60.0% 60.0% 60.0%

= Global Mobile EBIT $27 $100 $255 $526 $941 $1,594

x (1-Tax Rate) 59% 61% 63% 65% 67% 69%= After Tax EBIT $16 $61 $161 $342 $630 $1,100

x Discount Factor 0.91 0.83 0.76 0.70 0.64 0.58

= Present Value $14 $51 $122 $238 $400 $638

1 1

/ (Discount Rate 10%

- Perpetuity Growth) 3%

= Terminal UFCF Multiple 16.4x

x Terminal UFCF $1,138

= Terminal Value $18,691

x Discount Factor 0.58

= PV of Terminal Value $10,838+ Sum of Present Values $1,464

= Enterprise Value $12,302

/ Shares Outstanding 2742

= Per Share Impact $4.49 Source: Company data, Credit Suisse estimates.

(2) Theoretical Ad Network Opportunity

With the continued adoption of Facebooks Open Graph by third-party sites across the

Web, we believe that the company is positioned to develop its own ad network at some

point in time. In this case, a third party website (e.g., the New York Times) would provide

Facebook with ad inventory on its sites through Facebooks ad network platform. As we

highlighted in our report, Web 2.012: Tectonic Shifts in Online Display Advertising, dated

February 2012, we estimate that in 2012 ~75% of desktop display advertising impressions

will be sold through the indirect channel. Indirect inventory typically comes in two forms:

(1) for publishers that have a sales force, it is the proportion of inventory that they are

unable to sell directly to advertisers, and therefore liquidate through third-party

intermediaries; (2) for publishers that do not have a sales force, all inventory would

typically be sold through the indirect channel.

In Exhibit 54, we lay out the basic display advertising supply chain, with the shaded grey

areas representing parts of the supply chain in display in which Facebook already has

and/or could easily develop its capabilities. In our opinion, Facebook, by virtue of traffic

and user data, has many of the key pieces to disrupt the indirect display value chain. A

key differentiator is the richness of a social networks user data and the potential for

socially-enhanced ads. However, as we contemplate this opportunity, we note that an area

of sensitivity is user privacy. Specifically, some users may not be receptive to Facebookadvertisements following them around the Web.

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Exhibit 54:Facebook Potential Capability Across Display Ad Ecosystem

BehavioralOffline to

OnlineRe-targeting Search Hybrid

Advertiser Ad Agency

Demand SidePlatform

Ad Network

AdExchange

Supply SidePlatform

Publisher User

Information& Content

Eyeballs/Clicks/Actions

Ad $ s

Core Display Advertising Value Chain

Data Suppliers

Data Exchanges & DMPS

Potential Disruption


To forecast this opportunity, as detailed in Exhibit 55, we use the following approach:

We begin by sizing and forecasting the total indirect online display advertising market.

We estimate that on a global basis, this market will be $5.4 billion in 2012, and could

rise at a 23.5% five-year CAGR to $15.7 billion by 2017.

Next, we estimate gross ad network revenue by assuming that Facebook will be able to

gain 5% share of the market per year.

In general, within the indirect display segment, the network/exchanges keep 30% of the

gross revenue, with the remaining portion paid out to publishers in exchange for

supplying the inventory, known as traffic acquisition costs (TAC). By deducting the TAC

from gross revenue, we derive net ad network revenue. Based on our estimates, we

project net ad network revenue of $82 million in 2012, and assuming our share

estimates are correct, this figure could rise to $1.4 billion by 2017, a 77% five-year

CAGR.

Lastly, we apply an EBIT margin to net revenue of 75%, which is above our blended

margin estimate, as we believe the ad network will leverage much of the companys

existing infrastructure.

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Exhibit 55:Facebook Ad Network Opportunity, 2012-2017E

CAGR

2012E 2013E 2014E 2015E 2016E 2017E 12-'17

Ad Network

Total U.S. Indirect / Non-Gaurenteed Online Display Advertising $4,946 $5,746 $6,630 $7,603 $8,711 $9,997 15.1%

- U.S. Indirect Display Market - Mobile $663 $853 $1,031 $1,186 $1,344 $1,525 18.1%

= U.S. Indirect/Non-Gaurenteed Online Display Adv. X-Mobile $4,284 $4,893 $5,599 $6,417 $7,366 $8,472 14.6%

/ % US 78.3% 71.2% 64.5% 61.6% 56.2% 53.9% -7.2%= Global Indirect/Non-Gaurenteed Online Display Adv. X-Mobile $5,471 $6,873 $8,686 $10,410 $13,117 $15,716 23.5%

x Facebook Share 5% 10% 15% 20% 25% 30% 43.1%

= Facebook Gross Ad Network Revenue $274 $687 $1,303 $2,082 $3,279 $4,715 76.7%

x (1-Traffic Acquisition Cost) 30% 30% 30% 30% 30% 30% 0.0%

= Facebook Net Ad Network Revenue $82 $206 $391 $625 $984 $1,414 76.7%

x EBIT % of Net Revenue 75% 75% 75% 75% 75% 75% 0.0%

= FB Ad Network Non-GAAP EBIT $62 $155 $293 $468 $738 $1,061 76.7%

memo: Non-GAAP EBIT Margin % of Gross Revenue 22.5% 22.5% 22.5% 22.5% 22.5% 22.5%


To ascribe a value to Facebooks advertising network opportunity in Exhibit 56, we

estimate the net present value of the opportunity by developing and discounting our cash

flow estimates generated from our EBIT projections. In terms of key assumptions, weassume a tax rate in each year that is consistent with our company-wide model, a 10%

discount rate, and 3% perpetual growth rate. Based on these assumptions, we estimate

Facebooks advertising network opportunity to be worth $8.4 billion in enterprise value or

$3.07 per share.

Exhibit 56:NPV of Facebook Advertising Network Opportunity

2012E 2013E 2014E 2015E 2016E 2017E

NPV of Ad Network Opportunity

Facebook Ad Network Gross Revenues $274 $687 $1,303 $2,082 $3,279 $4,715

x EBIT Margin 22.5% 22.5% 22.5% 22.5% 22.5% 22.5%

= Global Ad Network Non-GAAP EBIT $62 $155 $293 $468 $738 $1,061

x (1-Tax Rate) 59.0% 61.0% 63.0% 65.0% 67.0% 69.0%

= After Tax EBIT $36 $94 $185 $305 $494 $73

fb_csfb july 2012

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