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Facebook's IPO Filing: A Quick Read

Enterprise Social Networks: A Guided Tour
Enterprise Social Networks: A Guided Tour

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Facebook's filing for an initial public offering Wednesday was greeted by waves of superlatives from investors, financial analysts, and social software enthusiasts who have been awaiting this day for a long time.

"Facebook's IPO is the ultimate proof that social is the new way to connect and share personal information. Their success has led to the creation of new markets and re-defined existing ones. It paved the way for us at Jive to bring the social revolution to the enterprise and have one of the most successful IPOs last year," said Tony Zingale, CEO of Jive Software, which recently had its own successful IPO based on selling software for enterprise social collaboration and outreach to customers. Jive stock has been trading at about $15, giving the company a value of more than $800 million. LinkedIn, which whet the market's appetite for social networking last year, has a market capitalization of about $7 billion.

Facebook's IPO is orders of magnitude bigger, expected to raise at least $5 billion and value the company at $75 billion to $100 billion. On Wednesday, Facebook filed a registration with the Securities and Exchange Commission for an initial stock sale anticipated to arrive this spring.

The paperwork reveals that in 2011, Facebook enjoyed revenue of $3.7 billion and net income of $1 billion. As of December, the social network had 845 million monthly active users and 327 million people visiting the site every day.

[ Facebook will soon make its Timeline mandatory for users. See Facebook Timeline: 5 Facts You Need To Know. ]

In the section that itemizes the business risks the company faces, Facebook mentions its heavy reliance on advertising as a source of income. "In 2009, 2010, and 2011, advertising accounted for 98%, 95%, and 85%, respectively, of our revenue," the filing states. Meanwhile, some of the activity on the Facebook network is shifting to mobile users (to whom Facebook does not currently show ads) and to external websites that integrate with Facebook through application programming interfaces, allowing users to get some of the Facebook experience without viewing the ads.

Facebook said it currently has 425 million monthly active users who come in through mobile, and does not "currently generate any meaningful revenue" from those interactions.

While application integration has its risks, it also has benefits. Techcrunch predictied Facebook will key ads to Open Graph actions to integrate applications for social reading of news or listening to music and new actions developers are starting to define. According to Techcrunch, this detailed information about user behavior could emerge as Facebook's answer to the way Google uses search queries to determine user intentions and target advertisements.

Facebook has diversified by adding payment fees on Facebook Credits as an additional source of revenue, but that's being used almost entirely for items sold in virtual games--with one dominant vendor. "In 2011, Zynga accounted for approximately 12% of our revenue, which amount was comprised of revenue derived from payments processing fees related to Zynga's sales of virtual goods and from direct advertising purchased by Zynga. Additionally, Zynga's apps generate a significant number of pages on which we display ads from other advertisers," the filing acknowledges, calling out the risk of the Zynga relationship souring as significant one by itself.

In addition to releasing some eagerly awaited numbers, Facebook published a letter from its founder and CEO on the company's direction.

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