I have written two articles about modeling out Facebook. The
first one walked your through the basics of
how to build the model.
The basics were mostly concerned with using the metrics to come to
a revenue estimate. The second focused on how a few
bulge bracket brokerages models
look to give you a benchmark or a guideline. These ideas were again
just speaking to the topline.
With the company reporting after the close tonight (7/26/12) I
thought we should get the rest of the model up to speed to come up
with an EPS estimate.
Where we left off
Right now, our model should have an income statement tab, a revenue
tab and tabs for each of the four geographies that Facebook will
report on. The next step is to add in the rest of the operating
expenses and do some math and we should get an EPS estimate.
Go ahead and create tabs for Cost of Revenue, Marketing and Sales,
R&D, G&A and Stock Based Compensation. Each expense line
item needs its own tab to help give a clear view of how they relate
to revenue. It also gives us the flexibility to add in data points
that may be revealed on the call.
Cost of Revenue (COR) is a pretty simple one to address. What I do
it take the Income statement that we have already built and copy
and paste it into the COR tab. I have my historical numbers from
the most recently field S-1 or maybe you could "borrow" them from
another model. COR is basically the transaction costs that are
charged to the company in the process of collecting the revenue.
Most of the time they are related to credit card and processing
I take the historical numbers and take a look at them as a percent
of revenue. I do a simple equation for all three revenue line items
(Advertising, Payments and Total). This gives me a trend of the
percentage of revenue that COR has been. Next I will simply map out
the sequential growth of COR. I will put the sequential growth of
revenue directly under that to see how each move in tandem. Finally
I will look at annual growth of COR and compare that to revenue.
At this point my COR tab will look like this:
I went ahead and modeled in a 350 number for COR for 2Q12. That
gives me a 63% gross margin, a slight decrease from the previous
quarter. It also works out to be the same sequential growth rate
that the company experience in 2Q11. I see it slightly ticking up
on an annual basis, and this sets the company up to make slight
improvements in this number for the next several quarters.
The idea of being set up for the next several quarters is a very
important one. The company is very young and this is the first
public earnings release. It is important that the company beat
expectations, but it is even more important that they can show
steady progress throughout the remainder of the year. This is gets
into some grey areas of accounting and managing revenue, expenses
and earnings, but suffice it to say it's important.
We should so the same thing for the other tabs. Data points are
important things and you can add in head counts to look at
efficiencies. Other data points can easily be added into any of the
tabs down the road, but for now, let's just keep the model simple.
The Rest of the Expenses
The Marketing and Sales (M&S) tab can easily be structured in
the same fashion. I do a simply copy and paste of the percentage
equations as well as the growth equations. Be careful here as the
rows have skipped down one line. That can change some of the
equations so make sure to review each line. I have marketing at 210
million as we saw a boost from 1Q11 to 2Q11 of 51% sequential
growth and I am looking for a more modest 32% growth. As a
percentage of sales, M&S also increased over the same time
period. M&S is a function of salaries, commissions and
Research & Development (R&D) is a pretty static number that
is reflective of investment in the future operations of the
company. As a growth company, we expect R&D to grow
significantly over the next several years. The profitability of the
company can really be managed in this line item more than others
over the short term. Over the long term, this is where the
profitability comes from. I have 195 million as a modest level of
sales and a slight uptick from the previous quarter.
General & Administrative (G&A) is reflective of fixed costs
of the business. Things like rent or utilities are the basis of
this. Managerial salaries are also falling into this bucket, so
this is where Mark Zuckerberg's 2013 salary of $1 gets dumped into.
Other administrators salary's' make up the bulk of this line item.
I did a Stock based compensation tab, but that is getting a little
too advanced for the purpose of this and that line item get backed
out of the EPS equation anyway. So let's skip that for now and if
you need to get some clarity on that topic feel free to email me.
Tying it Together
I link all the estimates in each tab to the appropriate line item
in the income statement and now I do some basic math. I subtract
COR from Total revenue to get gross margin. I add all the expenses
together and subtract that from gross margin to get my operating
Now I address to other line items that we have little control over.
Interest Expense and Other. Interest expense is just what it sounds
like but when the company has several billion dollars in cash it
will likely turn into interest income. Therefore expense (as
reported) is a negative number. Other refers to items where the
company made money but not from its core segments of advertising or
Taxes are next and this is very subjective right now. The company
might guide to year end rates, but for now let's stick to a rate
that is close to what they paid in the most recent quarter.
The rest is just adding and then dividing to come to an estimate.
One trick that I have found helpful is to make a tab for each
quarter that compares the year ago number, the most recent quarter
and your estimate to the actual. This way you have a reference
point to see how your analysis skills have progressed. I also like
to include the key metrics on that page as well to keep track of
those estimates too. Before I enter in anything else I like to copy
and paste special (values) to cut the cord if you will from the
estimates to the quarterly page. This ensures that my estimates
remain intact when I update my metric pages with the actual
You now have your frame work for building your own Facebook model
and coming up with an educated guess on what the EPS will be. My
estimate is calling for EPS of $0.10 which is one penny higher than
the Zacks Consensus Estimate.
Feel free to comment below on what you think Facebook earnings will
be for 2Q12!
Brian Bolan is a Stock Strategist for Zacks.com. He is also the
Editor in charge of the
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