EFTA01104689.pdf

North America Equity Research J.P. Morgan 12 September 2013 Overweight Facebook FB, FB US Pike: $45.04 Expecting Strong Advertising Traction to Build Toward A Price Target: $53.00 Year-End & Into '14; Reiterate Overweight, PT to $53 Previous: $44.00 We are incrementally positive on Facebook shares as we believe advertising traction Internet across both Mobile and Desktop continues to build into year-end and 2014. 2Q13 Doug Anmuth AC marked an inflection point in advertiser demand and ad quality for Facebook, which enabled the company to increase inventory while simultaneously realizing higher pricing. We believe that momentum in the ad platform continues as marketer feedback Bloomberg JPMA ANMUTH cGO> around Mobile, News Feed, and FBX continues to improve along with ROI. We are Kalzad Gotta, CFA raising our Mobile and Desktop News Feed estimates going forward, and we project Mobile will surpass 50% of Facebook's ad revenue in 4Q13 and represent 60% of ad revenue in 2014. We reiterate our Overweight rating and are raising Bo Nam our price target from $44 to $53. • Seeing a broader advertiser base in 3Q. During 3Q we believe Facebook has Diana R Kluger expanded its advertiser base, with a notable pick-up in Entertainment industry ads across TV shows, movies, and console game launches. These ads often J.P. Morgan Securities LLC feature click-to-play video—which bodes well for Facebook's likely more formal launch of News Feed video ads in coming months—and they likely command Price Performance premium pricing based on guaranteed timing and the more advanced format. 4 • FBX ramping up. The Facebook Exchange (FBX) was a small contributor in 2Q, but we believe it will become an increasingly important part of Facebook's ad platform as re-targeted ads move further into the Desktop and Mobile News Is Feeds. Our anecdotal checks suggest that FBX ads have increased notably in the Sepl2 Ost.12 IbM3 AMI MO3 Fe stare price 0) Desktop Right Rail—often representing the majority of ads shown—and marketer S1P500 (tamed) feedback after a few months of FBX in the Desktop News Feed is positive. Triggit YTD 1m 3m 12m data across 90 campaigns and 4.9B impressions suggests increased FBX ads in the Abe 609% 17.0% 87.4% 131.8 % Desktop News Feed and increased adoption of dynamic ads are driving a 27x Rel 45.4% 17.1% 815% 114.0 increase in CTRs and a 50% decrease in eCPC (implying a 13-14x increase in % CPMs) since the end of 2012. • Estimate and PT increases. Mobile estimates in our bottom-up model increase to $2.968 in 2013 and $5.95B in 2014, up from $2.838 and $5.098 previously, increases of 3% and 12%. We now project 2013 and 2014 non-GAAP EPS of $0.76 and $1.09. We reiterate our Overweight rating and are raising our price target from $44 to $53 based on the average of our DCF analysis ($56), 17x 2015E EBITDA ($56), and 33x 2015 non-CAAP EPS ($47). Facebook Inc. (FB;FB US) FYE Dec 2012A 2013E 2013E 2014E 2014E 2015E 2015E Company Data (Prey) (Corr) (Prev) (Curr) (Prey) (Cur') Price (5) 45.04 EPS - Repotted (S) Date Of Price 11 Sep 13 01 (Mar) 0.12 0.12A 0.12A 52-week Range (5) 45.09-18.80 02 (Jun) 0.12 0.19A 0.19A Market Cap ($ mn) 110,393.00 03 (Sep) 0.12 0.19 0.20 Fiscal Year End Dee 04 (Dec) 0.17 0.23 0.24 Shares 0/S (mn) 2,451 FY 0.54 0.74 0.76 0.98 1.09 1.25 1.43 Price Target ($) 53.00 CONSENSUS_EPS Price Target End Date 31-Dec-14 Bloomberg EPS FY (5) 0.51 - 0.71 0.95 1.26 Source: Company data. Bloomberg. J.P. Morgan estimates. See page 17 for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. Asa 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. www.jpmorganmarkets.com EFTA01104689 Dou Animal North America Equity Research 12 September 2013 J.P. Morgan Expecting Strong Advertising Traction to Build Toward Year-End and Into 2014; Reiterate Overweight, Price Target to $53 We are incrementally positive on Facebook shares as we believe advertising traction across both Mobile and Desktop continues to build into year-end and 2014. 2Q13 marked an inflection point in advertiser demand and ad quality for Facebook, which enabled the company to increase inventory while simultaneously realizing higher pricing. We believe that momentum in the ad platform continues as marketer feedback around Mobile, News Feed, and FBX continues to improve along with ROI. We do not believe ongoing strength is attributable to one single driver, but rather the combined impact of stronger sales efforts, improved advertiser education, better tracking and measurement, and simplified ad formats. During 3Q we believe Facebook has expanded its advertiser base, with a notable pick-up in Entertainment industry ads across TV shows, movies, and console game launches. These ads often feature click-to-play video—which bodes well for Facebook's likely more formal launch of News Feed video ads in coming months— and they likely command premium pricing based on guaranteed timing and the more advanced format. The Facebook Exchange (FBX) was a small contributor in 2Q, but we believe it will become an increasingly important part of Facebook's ad platform as re- targeted ads move further into the Desktop and Mobile News Feeds. Our anecdotal checks suggest that FBX ads have increased notably in the Desktop Right Rail—often representing the majority of ads shown—and marketer feedback after a few months of FBX in the Desktop News Feed is positive. Triggit data across 90 campaigns and 4.9B impressions suggests increased FBX ads in the Desktop News Feed and increased adoption ofdynamic ads are driving a 27x increase in click- through rates (CTR) and a 50% decrease in eCPC (implying a 13-14x increase in CPMs) since the end of 2012. Desktop News Feed FBX ads began in May of this year and they are becoming more prevalent, but we would also expect them to extend into the Mobile News Feed in coming months, thereby increasing the relevance and quality ofmobile ads. Advertiser targeting should also improve going forward as Custom Audiences becomes easier to use. We are raising our Mobile and Desktop News Feed estimates going fonvard, and we project Mobile will surpass 50% of Facebook's ad revenue in 4Q13 and represent 60% of ad revenue in 2014. Mobile estimates in our bottom-up model increase to $2.96B in 2013 and $5.95B in 2014, up from $2.83B and $5.09B previously, increases of 3% and 12%. We remain positive on Facebook shares as user engagement remains strong with mobile more than offsetting desktop declines, and Facebook still early in its overall advertising trajectory. We reiterate our Overweight rating and are raising our price target from $44 to $53 based on the average of our DCF analysis ($56), 17x 2015E EBITDA ($56), and 33x 2015 non- GAAP EPS ($47). 2 EFTA01104690 Dou Anmuth North America Equity Research 12 September 2013 J.P.Morgan Adjusting Estimates Overall: We am raising our overall Facebook revenue, EBITDA, and EPS estimates as we are increasingly optimistic on Facebook's ability to monetize the News Feed, particularly in Mobile. Overall, our 2013 and 2014 estimates for revenue increase by 2-3% and EBITDA increases by 12%. See Figure I below for more details. Figure 1: J.P. Mor an's Revised Facebook Estimates FK•boolc 3013 NYE 4013491E 2913 JPIE 20144940E 2015 AIME itereseee Old Now On NIINI Old New Old Mow Old Now Odereslag Revenue 14293 1.762 1.852 1097 e469 6493 0430 ABM 11.161 12426 WV &oath at% 01.3% 469% 574% 616% 664% J61% 479% 26.4% 290% % ce7v5 de 5.5% 74% 3.1% 124% 14.9% MOS Revenue 601 842 996 1.091 2829 2961 5482 5,963 7.587 9.9)3 Y/Y09:591 4294% 453.6% 225,7% 2516% 502.5% 531714 WO% 1070% 490% 49.6% %Nevi 440 46% 9.5% 4.7% 199% 17.4% 0461.16.TolAIR.24 868 910 951 1.0% 3360 3432 3.738 3.945 3.575 3.923 WYGe401 49% -26% 45% 4.7% -3.5% 10% 21% 54% 44% .06% %569 vs 00 2.5% 52% 2.0% 55% 9.7% Deddte RI0MRail Rev NO 620 646 646 2001 2006 2269 2209 1.972 1.972 WI Growth -260% -268% -24.7% -243% -24.6% -24.6% -40 2% -142% 419% 439% %1900301 0.0% 0.0% 0.0% 00% 00% 044.4.7016444 Ned Rye 261 261 311 361 994 1.066 1ASO 1.667 IA00 1:162 1710.totiM 241.4% 2701% 027% MO% 200.9% 2869% 159% .56.5% wetc 47.0% %this oif 94% 160% 7,2% 14.3% 21.7% Payeenia Renews 2CCI 201 201 201 831 831 798 738 762 762 AY Ciente 154% 193% -21.4% 41.4% 2.6% 29,4 42% -92% 42% 42% % /419 vs de 00% 0,0% 0,0% 0.0% 00% TolaIRK4ain IASI 1.956 2.153 2.298 7.320 7524 9.610 101806 11.924 13.9$1. 7.70•916. 40.2% 64,9% 359% 410% 438% 479% 31.4% 420% 24.0% 27.2% %569 vs. 031 3.1% 6,7% 2.9% 11.1% 140% 40110.4 LOIS 1011 1.182 1.247 4.056 4.145 5.102 5.727 6.392 7433 Y4'00;41'. 494% 527% 234% 299% 394% 425% 25496 362% 251% 290% Mem rep SSA% 542% 549% 54.3% 564% SSIK 510% 53.8% 516% 540% % dun. al 24% 6.5% 2.2% 112% 147% PF EPS 5019 5020 5023 5024 50.74 50.76 5098 51.09 51.25 51.43 44.50torAh 58.5% 636% 339% 42.7% 380% 41.9% 322% 431% 27.6% 315% % <VW, al 3.1% 13,6% le% 11.9% 144% Source: J.P. Morgan estmates, Company data. Simplified Ad Formats and Broader Advertiser Base We think Facebook's efforts to simplify its ad formats have removed friction for marketers and helped create more News Feed-eligible ads, thereby spurring the advertising auction process. Beyond moving from 27 to 13 ad formats, the company recently announced it was standardizing image sizes for ads, making them consistent across all types of formats, across Desktop and Mobile. Faccbook has also increased the image sizes for its Page Post link ads on desktop which we think should drive higher click-through rates and engagement. We believe Facebook's advertiser base continues to widen and think advertisers in the Entertainment category have increased their Facebook ad spend in 3Q, likely due to the heavy summer movie season as well as advertisements around the fall TV lineup. Examples of entertainment advertisers in 3Q include ads for the movies Getanay and Lone Ranger, TV shows The Million Second Quiz and Masters ofSer, as well as Take Two's upcoming release of the console game Grand Theft Auto V. 3 EFTA01104691 Dou Anmuth North America Equity Research 12 September 2013 J.P.Morgan We also expect Facebook's 4Q revenue growth to be bolstered by the retail vertical as we believe large retailers likely made significant strides in terms of measuring the ROI of their Facebook ad spend over the last year. Expect FBX To Drive Continued Yield Improvements On Desktop... Mobile Next? While Facebook has indicated that FBX represents a relatively small percentage of its ad revenue, we expect FBX to drive meaningful yield improvements — particularly on Desktop Right Rail — over time. We believe FBX remains relatively underpenetrated even among direct response advertisers and we expect additional advertiser adoption to drive yield increases as FBX ads offer higher ROI than many other direct response channels. According to Triggit, a Facebook Preferred Marketing Developer (PMD), FBX ads are currently adopted by just 9% of the Internet Retailer Top 500 sites and less than 7% of the top 10k Alexa sites. We note that Facebook currently requires PMDs (Preferred Marketing Developers) to individually approve clients for FBX ads and we expect further streamlining of its ad-buying process. Triggit data across 90 campaigns and 4.9B impressions suggests increased FBX ads in the Desktop News Feed and increased adoption of dynamic ads are driving a 27x increase in CTRs and a 50% decrease in eCPC (implying a 13-14x increase in CPMs) since the end of 2012. Note that FBX ads in the Desktop News Feed went live in early May 2013, after an initial test phase. We believe Facebook's Desktop Right Rail ads have CPMs of -$0.40 in the U.S though our checks suggest that industry CPMs for re-targeting are closer to -42.00, a significant gap that we believe FBX can help tighten over time as more advertisers shift to FBX and FBX ads increasingly appear in the News Feed going forward. Based on ow anecdotal checks, we believe FBX ads now represent the majority of Desktop Right Rail ads, up significantly over the last few quarters. We also believe FBX ads are becoming more prevalent in the Desktop News Feed with sites like Booking.com and other OTAs increasing their ad exposure in the Desktop News Feed. We believe Facebook is also working on adding Mobile News Feed ads into its exchange. Video Ads A Potential Upside Driver in 2014 We believe video ads can be a significant driver of growth for Facebook over time. According to eMarketer, digital video ad spend will reach $4.1B in 2013, up 41% Y/Y, and it will continue be one of the fastest growing segments of online advertising. While video ads already exist in both the desktop and mobile News Feeds, they are primarily click-to-play Page Post ads. Industry publications such as AdAge have suggested that Facebook is working with advertisers to launch auto-play video ads in the Desktop and Mobile News Feed for up to $1M-S2.4M per day. Advertiser demand for Facebook video ads appears to be strong, though the launch of auto-play video ads has seemingly been repeatedly delayed as Facebook ensures it has the necessary technology backbone in place to support higher-bandwidth video ads while maintaining the user experience on the site. We think it is critical that Facebook maintains the user experience, and recent delays do not change our view that video ads will drive increased demand and higher pricing. 4 EFTA01104692 Dou Amish North America Equity Research 12 September 2013 J.P.Morgan Revisiting Our Bottom-Up Advertising Build In this section, we walk through revised estimates in our bottom-up advertising build which is based on three segments: I) Mobile News Feed; 2) Desktop News Feed; and 3) Desktop Right Rail. While overall ad revenue remains key, we believe the bottom-up build is useful for capturing the ongoing mix-shift from web to mobile that generally results in fewer impressions, but higher overall eCPMs. 5 EFTA01104693 DOU Plineith NO7111 ArneriCa EquIty Research 12 September 2013 J.P.Morgan Figure 2: Facebook Bottom-Up Advertising Build $ In millions except per user ligures nMllnnt p14740rAm1 2011A 10124 20124 30124 24 2012A 10134 20134 138 38 20136 2011E 2015E Mobile Mt»Fe» Anyer WW' 339 480 51$ 574 642 566 rle 716 617 P32 nm 1.033 1231 VOIsUeartey 0.7 070 000 096 100 006 1.07 1.12 120 128 1.17 1.40 1.56 IneeeproMeNtice 000 017 055 100 083 166 1.18 125 130 120 1.35 1.42 7410 Mnnmorse» 0 72 200 642 241 801 »37 1271 1501 1.155 1953 2710 7440 Impreieions In Polo0 . 1222 27145 $9/7744 04354 72.077 94448 1182» 138.017 421.710 712.884 010.264 171, G.0,e, MA MA MA MA NM 5397% 324% 134% 377% 69% 39% GO Grme MA MA 1507% Im% 22% 37% 23% 18% 4121114 10» $648 55.52 55.18 1531 55.18 $4193 $720 8710 $7.02 24.35 »SO Y/Y Cm,» MA MA MA MA MA 1% 37% 53% 32% 19% 1» 00 Dux» MA M4 .20% .6% 0% 34% .1% 10% Renm36.346 103 1402 $027 $048 2024 2432 $024 $099 $121 5368 5579 17.23 Item; enengmem6441.47 (mtion4) 3050 3300 3366 33 66 3168 3971 $8.56 $15.13 $125e 32003 $26.75 2/2020,a, NM NM NM MA NM 1843% 186% 319% 245% 59% 44% 00•34,40 NM NM 500% 22% 28% 109% 42% 76% AniPerre11ktertree,6221m1b215) - 3049 3156 3332 81.26 »15 3718 39.15 111.85 38 11 31631 32439 Mo6114114»1444 Rciwo 190 $11.8 31520 33017 8.11Q1 33715 14512 36413 31.0091 3211011 »NU 38.103.4 Ire Greeä3 NM NM 454% 257% 531% 101% 50% oes Ase* 1133% 107% 22% 76% 28% 30% % of Total MReer» 1% 14% 23% 11% 30% 41% 48% en 44% 00% CO% giliialleffialg emene kWh 803 838 867 890 643 910 929 915 962 905 90) 1939 VeleNtertey 1 1.07 1.03 132 100 1.03 096 090 085 ere oer eeo ere koprossions,Vh41.13a 005 017 016 060 030 070 080 026 0.90 085 0.95 1.03 Total limecoMorciOst 44 145 310 534 257 612 UI 682 676 660 756 764 Total lopetalees In Pmtod 3981 13.168 29166 48.594 93309 55.037 81502 62.790 62.158 240947 276.101 278.803 Y/Y Gran» NM NM NM MA NM 363% 123% 28% 157% 15% 1% GO Gabe. NM NM 114% 73% IN 17% 3% .7% CIA 11.50 $1.75 »71 $1.50 1293 1136 1390 $4.50 1510 $4.42 58030 $7.08 Y/Y Ono» NM NM NM MA NM 123% 66% 66% 51% 39% /7% 00 Ortga. NM NM 55% 29% .411 16% 15% 29% ihmembieu 3001 $003 1009 10.19 1033 1020 tose $030 3037 31 14 31 86 St» Pes»»eng nnore090 Mim') 3050 3103 12.74 32 74 31 34 3386 3229 $525 3310 $598 $4.72 YeGrowle NM NM NM NM NM 671% 129% 103% 13% 93% 24% GO Gram M4 M4 100% 171% 40% 184% -47% 143% An Pone1Reeroodley (»Ions) - 3025 WM 3157 30 75 3205 3261 3307 eses $292 $454 33» 04•10.» Ne»14441Ulme» $4.0 3208 176.2 1670.1 12243 $184.4 $2372 12821 4140.5 $1/414 11,8548 11251.4 Y/Y Gen» NM 932% 271% 112% 287% 65% 18% GO Gretel 286% 237% 123% 8% 29% HM 28% % of To» 44 »nonoe 2% 7% 13% 6% 15% 15% 18% 17%. 18% II% 15% 2444141049 Fad Roveouo [Mobile • Cosklose 14.0 $34.9 $228.3 $475.7 8744.9 8557.9 1883.5 811243 81= 540248 1722412 110956.0 Y/7 Cm.» NM NM 292% 441% 89% 43% 00 Grtue. 484% 551% 106% 17% t'6% 26% 29% 04410op Re Rd Ase> 1.34.Us 690 203 836 867 »0 243 910 929 945 962 935 905 1.039 VOIsUrs.Day 1.04 1.07 103 1.02 1.00 1.03 096 090 026 0.78 087 080 070 IncreoproMCoce 64.) 36.9 ee2 61.9 77.8 64.5 79.7 83.0 830 850 832 75.0 750 Total »smeen:30e 43 119 50 506 SO 864 54.728 69269 56034 69.632 69.359 68250 63.810 64222 59.719 64.5» To4111»nneilons In Ptdod 15.738.369 4.596919 4428304 4980291 6.303.482 20.508.186 6.266286 6.484512 $278.1111 5.870.521 24300.805 21.797.414 1%914.303 171, Goa* 34% 13% 26% 44% 30% 36% 40% 26% 27% 42% -9% GO Mose 5% 7% 0% 27% 4% 3% .3% 4CPM $029 $0.19 $021 38.17 $0.14 $0.17 $0.11 $0.11 $0.10 $0.11 $0.11 WM $4,19 171, Cm.» 2% 5% -74% 41% -74% AM 47% 42% 49% -39% es otrerese. 42% 70% -77% -V% -79% -8% 10% ReernoMAU 357 2166 81.16 1039 1436 3.19 30.78 14.77) 14813 10.67 $283 9230 61.90 An Pono3174nonatOst tentkail 1804 3952 51032 $9,43 $938 9966 $763 57.73 $682 37.02 $730 5627 56.40 Desimp Reell 14741 Rommee 13,154.0 »KO $957.1 5857.7 54153.3 41534.1 8687.1 3705.5 $627.9 45.8, $29663 12288.7 11971.5 llY Cm.* 0 30% 234e 7% .744 12% -er% -264h -ze,4 44% 44% 00 Geem 404 71% -10% .1% 40% 3% .11% 3% %of Tolie4.4 Rian,r,Q 96% 79% 64% 83% 56% 44% 16% 31% 40% 23% IS% 74141 Desktop Rovonuo PCs Food 13.1540 »720 1960.2 1836.0 11.023.3 13.8009 $871.5 $843.4 3•10.5 11.005.3 31731.6 33.9493 139211 Y/Y »von 69% 37% 26% II% 9% 21% 0% .4% -3% -2% 0% 4% GGGnreh 6% 12% 6% I» .75% 8% .3% 17% %of741444 Roten., 100% 100% 99% 84% 77% 89% 70% 39% 62% 48% 93% 40% 31% Mex.-K*4MM $4.$0 11.00 im? 11.71. $1.15 2452 NM $122 1436 21.05 $393 33 96 3378 Wr Germ 7% 3% 4% 4% •113 -72% -13% 47% -8% -12% -1% .5% TOTAL ADVIERTSING meng, $Q477 727 873 8211 961 1.032 ep 1.(63 1.133 1.177 1.216 1.147 1222 1.482 11.40sUme,02y 1.31 1.15 1.37 1.46 1.49 142 1.51 1.51 1.55 136 1.53 1.70 1.78 IncrospoWv»Ver 45 43 40 39 46 42 43 42 99 35 40 26 22 rees lereent+0, PD32 43.119 50.549 51.027 Mim 70.452 56.232 71.044 72.769 70203 66.585 70.037 82.428 58.034 Wes meremmet In P44470 19738208 4900500 4943944 5.039024 6411.140 20.030.449 9394.000 11440.182 4.454.444 1079737 2591111.183 22714.299 21.113.372 WYCeem 34% 18% 27% 46% 31% »% 43% 28% 4% 24% 41% .7% 0126.6697 5% r% 8% 27% 0% 4% .3% 4% CM »29 »18 $021 $022 $021 *21 $0.19 $024 $027 $0.35 $028 14343 $4301 viffam..* 2% 9% 7% .4% 3% 3% 13% 26% 67% 27% 66% 39% 670 Ortete 42% 13% 1% -4% -0% 24% 13% 27% 70741.ADVIOITM110 REVENUE 33 1841 $072.0 1102.0 11006.0 113212 842799 11246.0 315010 11.7622 12.000 $41033 WM 9 »WM Y/Y Gros» 69% 41% 39% 43% 61% 61% 58% 56% 49% 30% 04.FX Y/Y Gros* 0% 39% 33% 43% 43% 0% 43% 63% 61% 58% 56% 4914 30% 00 Gabe. -9% 74% 9% 22% -6% 28% 10% 20% %44 Tee Ad Avenue 100% 100% 100% 100% 100% 100% 100% 100% 100% ICO% 100% 100% 103% Nonn Fades 4 % 44 %eiinecom 009% 032% 1.11% 1.66% 1% 13)0% 234% 2.78% 330% 2.50% 4.34% sm Noe4 4405 /Os % olcoloi »inlna> 07% 15% 210% 358% 17.4%. 448% 559% 612% 692% 002% 76.9% 246% Source: Stelpany regle and J.P. Magen estimtet 6 EFTA01104694 Dom Anmuth North America Equity Research 12 September 2013 J.P.Morgan As shown in Figure 3 below, we expect Facebook to continue to benefit from overall user (MAUs) and engagement (visits/user/day) growth as mobile drives users and frequency of visits. Impressions per visit and overall impression volume is likely to come down, but we expect higher eCPMs on mobile and improving yield on desktop to more than offset the negative impacts of declining overall impressions in 2014 and 2015. We think further upside to our estimates could come from: 1) increases in mobile and ad load in overseas markets; 2) if the Facebook Exchange and other new targeting tools drive a rebound in Desktop Right Rail CPMs and stabilize Desktop revenue; and 3) video ads. Figure 3: Facebook Total Ad Revenue Growth Drivers In millions except per user Fig res on iniOnS eit:CI print Ism) 2061* 1012A 2012A 30121 40124 2012.4 1013.1 2013/1 3013E 4013E 2013E 2014E 2016E TOTAL AtivER119003 %Yew/4109% 727 673 928 961 1.002 951 1.083 1.1$) tor 1,216 1.147 1.322 1.462 11919t190.04/ 131 135 137 145 1.49 1.42 1.51 151 1.55 1 56 153 1,70 1.78 orninevo-nMs/11.1x4 46 49 40 39 46 42 43 42 39 35 40 26 22 TOW lenreseatn141Y/ 43,119 50.549 51.027 55.341 70.452 56432 71.044 72.769 70.203 55.92,6 70.037 82.426 56034 Taal Impressions In Pitied 19718.389 4400.030 4.643.484 5036.036 9411.140 20490949 6.394.000 6.640.162 6.451.664 6.070.717 25.563.581 22784399 21.182.387 WY Groom 34% 15% 27% 46% If% 3916 43% 28% .5% 2" -II% 00 Crony, 9% 7% 2714 CPU $0.20 10.19 10.21 $022 3921 3021 0.19 30.24 10.27 US$ 30.21 10.43 50.11 Y/Y &Clan 2% ne . 3% 3% 13% 26% 67% 27% 66% 30% OO otos* .72% 73% /14 -6% 24% 13% 27% TOTAL ADVIRT00401139311113 03.114.0 01721 33.0 11416.0 11329,0 34,2794. $4245.0 31.0091 $1.7612.2 $2406.1 10.103.1 0.017.9 112.924% Y/YG/0“Th 60% 37% 28% 36% 4 7% 36% 43% 67% 67% 58% 55% 46% 36% er4X WY 670.1111 0% 18% 33% 43% 43% 0% 4% 61% 61% 58% 56% 46% 30% 00 0A.411 -47% 14% 9% 22% -1/6 20% KS 20% % of Taal la0 Revalue 100% 100% 100% 100% 100% 1131% 100% 1120% 100% 100% 100% 100% 1060% New Feed 44 0% 011:0311moreamons 000% 0.32% 1.11% 1,58% 1% 1.99% 231% t78% 33)% 2.59% 4.34% 510% New Fee 48 a % elms1124..eflue 0.1% 3.5% 210% 36.0%. 17.4% 441% 559% 64.2% 692%, 60.7%. 76.9% 44.0% Source: Company reports and JP. Morgan ashrams. Facebook posted strongly accelerating ad revenue growth in 2Q 13, driven primarily by mobile ads. While increasing Facebook's overall share of ad budgets across both desktop and mobile is critical, we expect mobile to remain the primary focus. Facebook also sometimes has discretion around directing certain campaigns across formats, and we believe the highest quality ads and especially those that point to strong mobile sites will be pushed toward the Mobile News Feed. Mobile benefiting from several growth drivers As shown in Figure 4 below, we expect Mobile to surpass Desktop ad revenue in 4Q13. We remain optimistic on Mobile ad formats including Sponsored Stories, Promoted Posts, App-Install Ads, and others as Mobile ads have higher CFRs and significantly higher eCPMs relative to Desktop. 7 EFTA01104695 Dou Anmuth North America Equity Research 12 September 2013 J.P.Morgan Figure 4: Facebook Ad Revenue by Format S in millions 18.000 16.000 14.000 12.000 10.000 8,0:0 6,000 4,000 2,000 2011A 2012A 2013E 2014E 2015E 2016E • Mobile News Feed • Desktop News Feed •Desktop Right Ral Source: Company reports and J.P. Morgan emmates As shown in Figure 5 below, we expect mobile to continue witnessing very strong growth driven by increases in users, visit frequency, and ad load (impressions per user visit). We believe newer ad formats have been adopted more quickly by U.S. advertisers but international mobile ad load should increase over time. The mix-shift toward international markets such as Asia and Rest Of World could drive lower overall mobile eCPMs, but also greater impression volume. 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Morgan estimates. Desktop yields should improve over time We expect Facebook's desktop ad revenue to continue facing headwinds as users shift their usage towards mobile. While desktop users are likely to continue growing, we think a greater proportion of each user's Facebook usage is likely to shift toward mobile, resulting in declining desktop engagement metrics such as visits/user or minutes/user. We expect Facebook's desktop impressions to decline beginning in 2014 as increasing adoption of Desktop News Feed ads is more than offset by declining usage of Facebook on the desktop. However, we are more optimistic on improvements in desktop yield or eCPM as: 1) Facebook improves targeting capability; 2) third-party data through FBX and Custom Audiences pushes Facebook further down the purchase funnel, driving higher ROI and ad spend