10-Q 1 fb-6302013x10q.htm 10-Q FB-6.30.2013-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________ 
FORM 10-Q
____________________________________________ 
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission File Number: 001-35551
____________________________________________ 
FACEBOOK, INC.
(Exact name of registrant as specified in its charter)
____________________________________________ 
Delaware
20-1665019
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
1601 Willow Road, Menlo Park, California 94025
(Address of principal executive offices and Zip Code)
(650) 543-4800
(Registrant's telephone number, including area code)
 ____________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
Accelerated filer
 
¨
 
 
 
 
 
Non-accelerated filer
 
x (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No x
Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date.
Class
Number of Shares Outstanding
Class A Common Stock $0.000006 par value
1,817,515,157 shares outstanding as of July 23, 2013
Class B Common Stock $0.000006 par value
617,804,812 shares outstanding as of July 23, 2013



FACEBOOK, INC.
TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 


2


NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Unless expressly indicated or the context requires otherwise, the terms "Facebook," "company," "we," "us," and "our" in this document refer to Facebook, Inc., a Delaware corporation, and, where appropriate, its wholly owned subsidiaries. The term "Facebook" may also refer to our products, regardless of the manner in which they are accessed.

3


LIMITATIONS OF KEY METRICS AND OTHER DATA
The numbers for our key metrics, our daily active users (DAUs), monthly active users (MAUs), mobile MAUs, and average revenue per user (ARPU), and certain other metrics such as mobile DAUs and mobile-only MAUs, are calculated using internal company data based on the activity of user accounts. While these numbers are based on what we believe to be reasonable estimates of our user base for the applicable period of measurement, there are inherent challenges in measuring usage of our products across large online and mobile populations around the world. For example, there may be individuals who maintain one or more Facebook accounts in violation of our terms of service. We estimate, for example, that "duplicate" accounts (an account that a user maintains in addition to his or her principal account) may have represented approximately 5.0% of our worldwide MAUs as of December 31, 2012. We also seek to identify "false" accounts, which we divide into two categories: (1) user-misclassified accounts, where users have created personal profiles for a business, organization, or non-human entity such as a pet (such entities are permitted on Facebook using a Page rather than a personal profile under our terms of service); and (2) undesirable accounts, which represent user profiles that we determine are intended to be used for purposes that violate our terms of service, such as spamming. As of December 31, 2012, for example, we estimate user-misclassified accounts may have represented approximately 1.3% of our worldwide MAUs and undesirable accounts may have represented approximately 0.9% of our worldwide MAUs. We believe the percentage of accounts that are duplicate or false is meaningfully lower in developed markets such as the United States or Australia and higher in developing markets such as Indonesia and Turkey. However, these estimates are based on an internal review of a limited sample of accounts and we apply significant judgment in making this determination, such as identifying names that appear to be fake or other behavior that appears inauthentic to the reviewers. As such, our estimation of duplicate or false accounts may not accurately represent the actual number of such accounts. We are continually seeking to improve our ability to identify duplicate or false accounts and estimate the total number of such accounts, and such estimates may change due to improvements or changes in our methodology.
Some of our historical metrics through the second quarter of 2012 have also been affected by applications on certain mobile devices that automatically contact our servers for regular updates with no user action involved, and this activity can cause our system to count the user associated with such a device as an active user on the day such contact occurs. For example, we estimate that less than 5% of our estimated worldwide DAUs as of December 31, 2011 and 2010 resulted from this type of automatic mobile activity, and that this type of activity had a substantially smaller effect on our estimate of worldwide MAUs and mobile MAUs. The impact of this automatic activity on our metrics varies by geography because mobile usage varies in different regions of the world. In addition, our data regarding the geographic location of our users is estimated based on a number of factors, such as the user's IP address and self-disclosed location. These factors may not always accurately reflect the user's actual location. For example, a mobile-only user may appear to be accessing Facebook from the location of the proxy server that the user connects to rather than from the user's actual location. The methodologies used to measure user metrics may also be susceptible to algorithm or other technical errors. For example, in early June 2012, we discovered an error in the algorithm we used to estimate the geographic location of our users that affected our attribution of certain user locations for the period ended March 31, 2012. While this issue did not affect our overall worldwide DAU and MAU numbers, it did affect our attribution of users across different geographic regions. We estimate that the number of MAUs as of March 31, 2012 for the United States & Canada region was overstated as a result of the error by approximately 3% and this overstatement was offset by understatements in other regions. Our estimates for revenue by user location and revenue by user device are also affected by these factors. We regularly review and may adjust our processes for calculating these metrics to improve their accuracy. In addition, our DAU and MAU estimates will differ from estimates published by third parties due to differences in methodology. For example, some third parties are not able to accurately measure mobile users or do not count mobile users for certain user groups or at all in their analyses.
The numbers of DAUs, MAUs, mobile DAUs, mobile MAUs, and mobile-only MAUs discussed in this Quarterly Report on Form 10-Q, as well as ARPU, do not include users of Instagram unless they would otherwise qualify as such users, respectively, based on their other activities on Facebook. In addition, other user engagement metrics included herein do not include Instagram unless otherwise specifically stated.

4


PART I—FINANCIAL INFORMATION
Item 1.
Financial Statements
FACEBOOK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except for number of shares and par value)
(Unaudited)
 
June 30,
2013
 
December 31,
2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
3,001

 
$
2,384

Marketable securities
7,251

 
7,242

Accounts receivable, net of allowances for doubtful accounts of $26 and $22 as of June 30, 2013 and December 31, 2012, respectively
775

 
719

Income tax refundable
7

 
451

Prepaid expenses and other current assets
387

 
471

Total current assets
11,421

 
11,267

Property and equipment, net
2,577

 
2,391

Goodwill and intangible assets, net
1,631

 
1,388

Other assets
95

 
57

Total assets
$
15,724

 
$
15,103

Liabilities and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
55

 
$
65

Platform partners payable
172

 
169

Accrued expenses and other current liabilities
505

 
423

Deferred revenue and deposits
32

 
30

Current portion of capital lease obligations
316

 
365

Total current liabilities
1,080

 
1,052

Capital lease obligations, less current portion
351

 
491

Long-term debt
1,500

 
1,500

Other liabilities
444

 
305

Total liabilities
3,375

 
3,348

Stockholders' equity:
 
 
 
Common stock, $0.000006 par value; 5,000 million Class A shares authorized, 1,813 million and 1,671 million shares issued and outstanding, including 6 million and 2 million outstanding shares subject to repurchase as of June 30, 2013 and December 31, 2012, respectively; 4,141 million Class B shares authorized, 618 million and 701 million shares issued and outstanding, including 9 million and 11 million outstanding shares subject to repurchase as of June 30, 2013 and December 31, 2012, respectively

 

Additional paid-in capital
10,167

 
10,094

Accumulated other comprehensive (loss) income
(29
)
 
2

Retained earnings
2,211

 
1,659

Total stockholders' equity
12,349

 
11,755

Total liabilities and stockholders' equity
$
15,724

 
$
15,103

See Accompanying Notes to Condensed Consolidated Financial Statements.

5



FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited) 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Revenue
$
1,813

 
$
1,184

 
$
3,271

 
$
2,242

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
465

 
367

 
878

 
644

Research and development
344

 
705

 
637

 
858

Marketing and sales
269

 
392

 
472

 
535

General and administrative
173

 
463

 
349

 
567

Total costs and expenses
1,251

 
1,927

 
2,336

 
2,604

Income (loss) from operations
562

 
(743
)
 
935

 
(362
)
Interest and other (expense) income, net:
 
 
 
 
 
 
 
Interest expense
(14
)
 
(10
)
 
(29
)
 
(24
)
Other (expense) income, net
(3
)
 
(12
)
 
(8
)
 
3

Income (loss) before (provision for) benefit from income taxes
545

 
(765
)
 
898

 
(383
)
(Provision for) benefit from income taxes
(212
)
 
608

 
(346
)
 
431

Net income (loss)
$
333

 
$
(157
)
 
$
552

 
$
48

Less: Net income attributable to participating securities
2

 

 
3

 
21

Net income (loss) attributable to Class A and Class B common stockholders
$
331

 
$
(157
)
 
$
549

 
$
27

Earnings (loss) per share attributable to Class A and Class B common stockholders:
 
 
 
 
 
 
 
Basic
$
0.14

 
$
(0.08
)
 
$
0.23

 
$
0.02

Diluted
$
0.13

 
$
(0.08
)
 
$
0.22

 
$
0.02

Weighted average shares used to compute earnings (loss) per share attributable to Class A and Class B common stockholders:
 
 
 
 
 
 
 
Basic
2,407

 
1,879

 
2,397

 
1,613

Diluted
2,502

 
1,879

 
2,499

 
1,792

Share-based compensation expense included in costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
$
11

 
$
66

 
$
19

 
$
71

Research and development
151

 
545

 
268

 
605

Marketing and sales
33

 
232

 
57

 
251

General and administrative
29

 
263

 
50

 
282

Total share-based compensation expense
$
224

 
$
1,106

 
$
394

 
$
1,209

See Accompanying Notes to Condensed Consolidated Financial Statements.


6


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited) 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Net income (loss)
$
333

 
$
(157
)
 
$
552

 
$
48

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
(13
)
 
(21
)
 
(31
)
 
(22
)
Unrealized loss on available-for-sale investments, net of tax
(3
)
 
(1
)
 
(3
)
 
(1
)
Unrealized gain on derivative, net of tax
2

 

 
3

 

Comprehensive income (loss)
$
319

 
$
(179
)
 
$
521

 
$
25

See Accompanying Notes to Condensed Consolidated Financial Statements.

7


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Six Months Ended June 30,
 
2013
 
2012
Cash flows from operating activities
 
 
 
Net income
$
552

 
$
48

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
463

 
249

Lease abandonment expense
65

 
3

Loss on disposal or write-off of equipment
20

 
4

Share-based compensation
394

 
1,209

Deferred income taxes
19

 
(374
)
Tax benefit from share-based award activity
148

 
381

Excess tax benefit from share-based award activity
(155
)
 
(381
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(62
)
 
(40
)
Income tax refundable
444

 
(567
)
Prepaid expenses and other current assets
(16
)
 
(7
)
Other assets
(44
)
 
(9
)
Accounts payable
2

 
(8
)
Platform partners payable
3

 
(15
)
Accrued expenses and other current liabilities
9

 
186

Deferred revenue and deposits
2

 
(5
)
Other liabilities
197

 
7

Net cash provided by operating activities
2,041

 
681

Cash flows from investing activities
 
 
 
Purchases of property and equipment
(595
)
 
(866
)
Purchases of marketable securities
(3,460
)
 
(6,957
)
Sales of marketable securities
1,275

 
128

Maturities of marketable securities
2,174

 
1,106

Investments in non-marketable equity securities
(1
)
 
(3
)
Acquisitions of businesses, net of cash acquired, and purchases of intangible assets
(221
)
 
(575
)
Change in restricted cash and deposits
4

 
(3
)
Net cash used in investing activities
(824
)
 
(7,170
)
Cash flows from financing activities
 
 
 
Net proceeds from issuance of common stock

 
6,761

Taxes paid related to net share settlement of equity awards
(558
)
 

Proceeds from exercise of stock options
10

 
9

Proceeds from sale and lease-back transactions

 
82

Principal payments on capital lease obligations
(200
)
 
(143
)
Excess tax benefit from share-based award activity
155

 
381

Net cash (used in) provided by financing activities
(593
)
 
7,090

Effect of exchange rate changes on cash and cash equivalents
(7
)
 
(15
)
Net increase in cash and cash equivalents
617

 
586

Cash and cash equivalents at beginning of period
2,384

 
1,512

Cash and cash equivalents at end of period
$
3,001

 
$
2,098

See Accompanying Notes to Condensed Consolidated Financial Statements.

8


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Six Months Ended June 30,
 
2013
 
2012
Supplemental cash flow data
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
26

 
$
19

Income taxes
$
18

 
$
182

Cash received during the period for:
 
 
 
Income taxes
$
419

 
$

Non-cash investing and financing activities:
 
 
 
Net change in accounts payable and accrued expenses and other current liabilities related to property and equipment additions
$
(5
)
 
$
(59
)
Property and equipment acquired under capital leases
$
11

 
$
90

Fair value of shares issued related to acquisitions of businesses and other assets
$
77

 
$
25

See Accompanying Notes to Condensed Consolidated Financial Statements.

9


FACEBOOK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
The condensed consolidated balance sheet as of December 31, 2012 included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.
The condensed consolidated financial statements include the accounts of Facebook, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
The accompanying condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2013.
There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 that have had a material impact on our condensed consolidated financial statements and related notes.
Use of Estimates
Conformity with GAAP requires the use of estimates and judgments that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. GAAP requires us to make estimates and judgments in several areas, including, but not limited to, those related to revenue recognition, collectability of accounts receivable, contingent liabilities, fair value of financial instruments, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, and income taxes. These estimates are based on management's knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ materially from those estimates.
Reclassifications
We have reclassified certain prior period amounts within our condensed consolidated statements of cash flows to conform to our current year presentation.
Recently Issued and Adopted Accounting Pronouncement 

Comprehensive Income

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02) which is effective prospectively for public companies for reporting periods beginning after December 15, 2012. This new accounting standard improves the reporting of reclassifications out of accumulated other comprehensive income (AOCI) by requiring an entity to report the effect of significant reclassifications out of AOCI on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. We adopted this new guidance on January 1, 2013 and the adoption did not have a material effect on our condensed consolidated financial statements.

10


Note 2.
Acquisitions
In the six months ended June 30, 2013, we completed several business acquisitions for total consideration of $246 million, consisting of approximately $170 million in cash and 3 million vested shares of our Class A common stock which are not conditioned upon continuous employment. In addition, we issued 6 million shares of Class A common stock in connection with such acquisitions, which are conditioned upon continuous employment. These shares have been excluded from purchase consideration and will be recognized over the required service period as share-based compensation expense.
These acquisitions were not material to our condensed consolidated financial statements, either individually or in the aggregate. Pro forma results of operations related to our acquisitions during the six months ended June 30, 2013 have not been presented because they are not material to our condensed consolidated statements of operations, either individually or in the aggregate.
The following table summarizes the allocation of estimated fair values of the net assets acquired during the six months ended June 30, 2013, including related useful lives, where applicable:
 
in millions
 
Useful lives (in years)
Amortizable intangible assets:
 
 
 
Acquired technology
$
54

 
3 - 7
Tradename and other
26

 
2 - 10
Deferred tax liabilities
(9
)
 
 
Net assets acquired
$
71

 
 
Goodwill
175

 
 
Total fair value consideration
$
246

 
 
Goodwill generated from all business acquisitions completed during the six months ended June 30, 2013 is primarily attributable to expected synergies from future growth and potential monetization opportunities and $66 million of this goodwill is deductible for tax purposes.
In the six months ended June 30, 2013, we also acquired $57 million of patents and other intangible assets. Patents acquired during 2013 have estimated useful lives ranging from seven to 15 years from the dates of acquisition.
Note 3.
Earnings (Loss) per Share
We compute earnings (loss) per share (EPS) of Class A and Class B common stock using the two-class method required for participating securities. Prior to the date of our initial public offering (IPO) in May 2012, we considered all series of our convertible preferred stock to be participating securities due to their non-cumulative dividend rights. Immediately after the completion of our IPO, all outstanding shares of convertible preferred stock converted to Class B common stock. Additionally, we consider restricted stock awards to be participating securities because holders of such shares have non-forfeitable dividend rights in the event of our declaration of a dividend for common shares.
Undistributed earnings allocated to these participating securities are subtracted from net income in determining net income attributable to common stockholders. Net losses are not allocated to these participating securities. Basic EPS is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of our Class A and Class B common stock outstanding, adjusted for outstanding shares that are subject to repurchase.
For the calculation of diluted EPS, net income (loss) attributable to common stockholders for basic EPS is adjusted by the effect of dilutive securities, including awards under our equity compensation plans. In addition, the computation of the diluted EPS of Class A common stock assumes the conversion from Class B common stock, while the diluted EPS of Class B common stock does not assume the conversion of those shares. Diluted EPS attributable to common stockholders is computed by dividing the resulting net income (loss) attributable to common stockholders by the weighted-average number of fully diluted common shares outstanding.

Restricted stock units (RSUs) granted prior to January 1, 2011 vest upon the satisfaction of both a service condition and a liquidity condition. The liquidity condition was satisfied upon the occurrence of a qualifying event, defined as a change of control transaction or six months following the completion of our IPO. Our IPO did not occur until May 2012. Therefore, subsequent to the completion of our IPO in May 2012, these RSUs were included in our basic and diluted EPS calculation. RSUs granted on or

11


after January 1, 2011 (Post-2011 RSUs) are not subject to a liquidity condition in order to vest and are thus included in the calculation of diluted EPS for the three and six months ended June 30, 2013 and 2012.
We have excluded 50 million and 23 million Post-2011 RSUs from the EPS calculation for the three and six months ended June 30, 2013, respectively, and 8 million Post-2011 RSUs for the six months ended June 30, 2012 because the impact would be anti-dilutive. No dilutive securities have been included in the diluted EPS calculation for the three months ended June 30, 2012 due to our reporting of a net loss for the quarter.
Basic and diluted EPS are the same for each class of common stock because they are entitled to the same liquidation and dividend rights.

12


The numerators and denominators of the basic and diluted EPS computations for our common stock were calculated as follows (in millions, except per share amounts): 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
245

 
$
88

 
$
(31
)
 
$
(126
)
 
$
400

 
$
152

 
$
7

 
$
41

Less: Net income attributable to participating securities
2

 

 

 

 
2

 
1

 
3

 
18

Net income (loss) attributable to common stockholders
$
243

 
$
88

 
$
(31
)
 
$
(126
)
 
$
398

 
$
151

 
$
4

 
$
23

Denominator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
1,779

 
644

 
377

 
1,505

 
1,744

 
668

 
247

 
1,369

Less: Shares subject to repurchase
7

 
9

 
1

 
2

 
5

 
10

 
1

 
2

Number of shares used for basic EPS computation
1,772

 
635

 
376

 
1,503

 
1,739

 
658

 
246

 
1,367

Basic EPS
$
0.14

 
$
0.14

 
$
(0.08
)
 
$
(0.08
)
 
$
0.23

 
$
0.23

 
$
0.02

 
$
0.02

Diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
$
243

 
$
88

 
$
(31
)
 
$
(126
)
 
$
398

 
$
151

 
$
4

 
$
23

Reallocation of net income attributable to participating securities
2

 

 

 

 
3

 

 
1

 

Reallocation of net income (loss) as a result of conversion of Class B to Class A common stock
88

 

 
(126
)
 

 
151

 

 
23

 

Reallocation of net income to Class B common stock

 
10

 

 

 

 
17

 

 
1

Net income (loss) attributable to common stockholders for diluted EPS
$
333

 
$
98

 
$
(157
)
 
$
(126
)
 
$
552

 
$
168

 
$
28

 
$
24

Denominator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares used for basic EPS computation
1,772

 
635

 
376

 
1,503

 
1,739

 
658

 
246

 
1,367

Conversion of Class B to Class A common stock
635

 

 
1,503

 

 
658

 

 
1,367

 

Weighted average effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee stock options
73

 
73

 

 

 
75

 
75

 
155

 
155

RSUs
19

 
19

 

 

 
22

 
22

 
22

 
22

Shares subject to repurchase
3

 
3

 

 

 
5

 
5

 
2

 
2

Number of shares used for diluted EPS computation
2,502

 
730

 
1,879

 
1,503

 
2,499

 
760

 
1,792

 
1,546

Diluted EPS
$
0.13

 
$
0.13

 
$
(0.08
)
 
$
(0.08
)
 
$
0.22

 
$
0.22

 
$
0.02

 
$
0.02


13


Note 4.
Cash, Cash Equivalents and Marketable Securities
The following table sets forth the cash, cash equivalents and marketable securities for the periods presented (in millions):
 
June 30, 2013
 
December 31, 2012
Cash and cash equivalents:
 
 
 
Cash
$
1,020

 
$
1,513

Cash equivalents:

 

Money market funds
1,981

 
871

Total cash and cash equivalents
3,001

 
2,384

Marketable securities:
 
 
 
U.S. government securities
4,801

 
5,165

U.S. government agency securities
2,450

 
2,077

Total marketable securities
7,251

 
7,242

Total cash, cash equivalents and marketable securities
$
10,252

 
$
9,626

The gross unrealized gains or losses on our marketable securities as of June 30, 2013 and December 31, 2012 were not significant. In addition, there were no securities in a continuous loss position for 12 months or longer as of June 30, 2013 and December 31, 2012.
The following table classifies our marketable securities by contractual maturities (in millions):  
 
June 30, 2013
Due in one year
$
3,244

Due in one to two years
4,007

Total
$
7,251


14


Note 5.
Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis are summarized below (in millions): 
 
 
 
Fair Value Measurement at
Reporting Date Using
Description
June 30, 2013
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
1,981

 
$
1,981

 
$

 
$

Marketable securities:
 
 
 
 
 
 
 
U.S. government securities
4,801

 
4,801

 

 

U.S. government agency securities
2,450

 
2,450

 

 

Total cash equivalents and marketable securities
$
9,232

 
$
9,232

 
$

 
$

 
 
 
 
 
 
 
 
Other assets:
 
 
 
 
 
 
 
Derivative financial instrument
$
1

 
$

 
$
1

 
$

 
 
 
 
 
 
 
 
Other current liabilities:
 
 
 
 
 
 
 
Contingent consideration liability
$
4

 
$

 
$

 
$
4

 
 
 
Fair Value Measurement at
Reporting Date Using
Description
December 31, 2012
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
871

 
$
871

 
$

 
$

Marketable securities:
 
 
 
 
 
 
 
U.S. government securities
5,165

 
5,165

 

 

U.S. government agency securities
2,077

 
2,077

 

 

Total cash equivalents and marketable securities
$
8,113

 
$
8,113

 
$

 
$

 
 
 
 
 
 
 
 
Other current liabilities:
 
 
 
 
 
 
 
Contingent consideration liability
$
4

 
$

 
$

 
$
4

 
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
Derivative financial instrument
$
4

 
$

 
$
4

 
$

Our Level 2 derivative financial instrument represents our interest rate swap agreement which is valued based on a valuation model using significant inputs derived from or corroborated by observable market data.
We estimate the fair value of our Level 3 contingent consideration liability based on the probability assessment of an earn-out criteria. In developing these estimates, we consider factors not observed in the market and thus this represents a Level 3 measurement. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect our own assumptions in measuring fair value. Our fair value estimate of this liability was $6 million at the date of acquisition. Changes in the fair value of the contingent consideration liability subsequent to the acquisition date, such as changes in the probability assessment and our stock prices, are recognized in earnings in the period when the change in the estimated fair value occurs.

15


Note 6.
Property and Equipment
Property and equipment consisted of the following (in millions): 
 
June 30, 2013
 
December 31, 2012
Network equipment
$
2,117

 
$
1,912

Land
41

 
36

Buildings
966

 
594

Leasehold improvements
194

 
194

Computer software, office equipment and other
98

 
93

Construction in progress
175

 
444

Total
3,591

 
3,273

Less: Accumulated depreciation
(1,014
)
 
(882
)
Property and equipment, net
$
2,577

 
$
2,391

Construction in progress includes costs primarily related to the construction of data centers and equipment located in our data centers in Oregon, North Carolina and Sweden. Interest capitalized during the periods presented was not material.
Note 7.
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the six months ended June 30, 2013 are as follows (in millions): 
Balance as of December 31, 2012
$
587

Goodwill acquired
175

Balance as of June 30, 2013
$
762

Intangible assets consisted of the following (in millions):
 
 
 
June 30, 2013
 
December 31, 2012
 
Useful lives from date of acquisitions (in years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Amortizable intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired patents
3 - 18
 
$
738

 
$
(97
)
 
$
641

 
$
684

 
$
(53
)
 
$
631

Acquired technology
2 - 10
 
187

 
(46
)
 
141

 
133

 
(32
)
 
101

Tradename and other
2 - 10
 
123

 
(36
)
 
87

 
94

 
(25
)
 
69

Total
 
 
$
1,048

 
$
(179
)
 
$
869

 
$
911

 
$
(110
)
 
$
801

Amortization expense of intangible assets was $36 million and $69 million for the three and six months ended June 30, 2013, respectively, and $8 million and $13 million for the three and six months ended June 30, 2012, respectively.

16


As of June 30, 2013, estimated amortization expense for the unamortized acquired intangible assets for the next five years and thereafter is as follows (in millions):
The remainder of 2013
$
75

2014
141

2015
131

2016
118

2017
102

2018
70

Thereafter
232

 
$
869

Note 8.
Long-term Debt
We have an unsecured five-year revolving credit facility that allows us to borrow up to $5 billion at London Interbank Offered Rate (LIBOR) plus 1.0%, as well as an annual commitment fee of 0.10% on the daily undrawn balance. As of June 30, 2013, no amounts were drawn down and we were in compliance with the covenants under this credit facility.
We also have a three-year unsecured term loan facility (Amended and Restated Term Loan) expiring in October 2015 that allows us to borrow up to $1.5 billion with interest payable on the borrowed amounts set at LIBOR plus 1.0%, as well as an annual commitment fee of 0.10% on the daily undrawn balance of the facility. We fully drew down the $1.5 billion which will become due and payable in full on October 25, 2015. We have the option to repay this facility at any time prior to such date. As of June 30, 2013, we were in compliance with the covenants in the Amended and Restated Term Loan.
In connection with the draw down of the Amended and Restated Term Loan, we entered into a $1.5 billion interest rate swap agreement that converts the one-month LIBOR rate on the corresponding notional amount of debt to a fixed interest rate of 1.46% to hedge our exposure to interest rate fluctuation. This interest rate swap has a maturity date of October 25, 2015. We have designated the interest rate swap agreement as a qualifying hedging instrument and accounted for it as a cash flow hedge. We periodically assess the effectiveness of our hedged transaction. The interest rate swap agreement is currently our only derivative instrument and is not used for trading purposes.
For the six months ended June 30, 2013, the change in fair value of this interest rate swap agreement, net of tax was $3 million and is recognized in other comprehensive income. As of June 30, 2013, the fair value of $1 million was included in other assets on our condensed consolidated balance sheet. For the three and six months ended June 30, 2013, the amount in AOCI reclassified to interest expense was not significant. There were no realized gains or losses on this derivative other than those related to the periodic settlement of a portion of the interest rate swap.

We do not expect the amount of gains and losses in AOCI that will be reclassified to earnings during the next 12 months to be material.
Note 9.
Commitments and Contingencies
Leases
We entered into various capital lease arrangements to obtain property and equipment for our operations. Additionally, on occasion we purchased property and equipment for which we subsequently obtained capital financing under sale-leaseback transactions. These agreements are typically for three years, except for a building lease which is for 15 years, with interest rates ranging from 1% to 13%. The leases are secured by the underlying leased buildings and equipment. We also entered into various non-cancelable operating lease agreements for certain of our offices, equipment, land and data centers with original lease periods expiring between 2013 and 2027. We are committed to pay a portion of the related actual operating expenses under certain of these lease agreements. Certain of these arrangements have free rent periods and/or escalating rent payment provisions, and we recognize rent expense under such arrangements on a straight-line basis.
During the three and six months ended June 30, 2013, we recognized lease abandonment expense of $57 million and $65 million, respectively, primarily due to exiting certain leased data centers resulting from the migration of operations to our own data centers. Lease abandonment expense for the same periods in 2012 was not material.
Operating lease expense was $32 million and $73 million for the three and six months ended June 30, 2013, respectively, and $50 million and $101 million for the three and six months ended June 30, 2012, respectively.

17


Contingencies
Beginning on May 22, 2012, multiple putative class actions, derivative actions, and individual actions were filed in state and federal courts in the United States and in other jurisdictions against us, our directors, and/or certain of our officers alleging violation of securities laws or breach of fiduciary duties in connection with our IPO and seeking unspecified damages. We believe these lawsuits are without merit, and we intend to continue to vigorously defend them. On October 4, 2012, on our motion, the vast majority of the cases in the United States, along with multiple cases filed against The NASDAQ OMX Group, Inc. and The Nasdaq Stock Market LLC (collectively referred to herein as NASDAQ) alleging technical and other trading-related errors by NASDAQ in connection with our IPO, were ordered centralized for coordinated or consolidated pre-trial proceedings in the United States District Court for the Southern District of New York. On February 13, 2013, the court granted our motion to dismiss four derivative actions against our directors and certain of our officers with leave to amend. In September 2013, the court is scheduled to hear argument on our motion to dismiss the consolidated securities class action, as well as our motion to dismiss, and the plaintiffs' motion to remand to state court, certain other derivative actions. In addition, the events surrounding our IPO have become the subject of various government inquiries, and we are cooperating with those inquiries.
We are also currently parties to multiple other lawsuits related to our products, including patent infringement lawsuits as well as class action lawsuits brought by users and marketers, and we may in the future be subject to additional lawsuits and disputes. We are also involved in other claims, government investigations, and proceedings arising in the ordinary course of our business.
In the opinion of management, there was not at least a reasonable possibility we may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies relating to the matters set forth above. However, the outcome of litigation is inherently uncertain. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against us in the same reporting period for amounts in excess of management's expectations, our condensed consolidated financial statements of a particular reporting period could be materially adversely affected.
Note 10.
Stockholders' Equity
Share-based Compensation Plans
We maintain three share-based employee compensation plans: the 2012 Equity Incentive Plan (2012 Plan), the 2005 Stock Plan and the 2005 Officers' Stock Plan (collectively, Stock Plans). Our 2012 Plan serves as the successor to our 2005 Stock Plan and provides for the issuance of incentive and nonstatutory stock options, restricted stock awards, stock appreciation rights, RSUs, performance shares and stock bonuses to qualified employees, directors and consultants. The maximum term for stock options granted under the 2012 Plan may not exceed ten years from the date of grant. Our 2012 Plan will terminate ten years from the date of approval unless it is terminated earlier by our compensation committee. We have initially reserved 25,000,000 shares of our Class A common stock for issuance under our 2012 Plan, which amount increases on the first day of January of each of 2013 through 2022 based on a formula or as determined by the board of directors. Our board of directors elected not to increase the number of shares reserved for issuance in 2013. In addition, shares available for grant under the 2005 Stock Plan, which were reserved but not issued or subject to outstanding awards under the 2005 Stock Plan as of the effective date of our IPO, were added to the reserves of the 2012 Plan and shares that are withheld in connection with the net settlement of RSUs are also added to the reserves of the 2012 Plan.
In November 2005, we issued a nonstatutory stock option to our CEO to purchase 120,000,000 shares of our Class B common stock under the 2005 Officers' Stock Plan. As of June 30, 2013, the option had been partially exercised and the remaining option to purchase 60,000,000 shares is outstanding and fully vested. No options were available for future issuance under the 2005 Officers' Stock Plan.

18


The following table summarizes the stock option activity under the Stock Plans during the six months ended June 30, 2013: 
 
Shares Subject to Options Outstanding
 
Number of
Shares
 
Weighted
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value(1)
 
(in thousands)
 
 
 
(in years)
 
(in millions)
Balance as of December 31, 2012
122,821

 
$
0.85

 
3.79
 
$
3,166

Stock options exercised
(21,419
)
 
0.52

 
 
 
 
Balance as of June 30, 2013
101,402

 
$
0.92

 
3.25
 
$
2,427

Stock options vested and expected to vest as of June 30, 2013
101,374

 
$
0.92

 
3.25
 
$
2,427

Stock options exercisable as of June 30, 2013
94,613

 
$
0.36

 
3.00
 
$
2,318

(1)
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the closing price of our Class A common stock of $24.88 on June 30, 2013.
The aggregate intrinsic value of the options exercised was $269 million and $580 million for the three and six months ended June 30, 2013, respectively, and $2.35 billion and $2.98 billion for the three and six months ended June 30, 2012, respectively.
The following table summarizes the activities for our unvested RSUs for the six months ended June 30, 2013:
 
Unvested RSUs
 
Number of Shares
 
Weighted Average Grant Date Fair Value
 
(in thousands)
 
 
Unvested at December 31, 2012
113,044

 
$
21.38

Granted
45,127

 
27.47

Vested
(29,650
)
 
16.05

Forfeited
(6,389
)
 
24.23

Unvested at June 30, 2013
122,132

 
$
24.78

As of June 30, 2013, there was $3.06 billion of unrecognized share-based compensation expense, of which $2.71 billion is related to RSUs and $347 million is related to restricted shares and stock options. This unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately three years.
Note 11.
Income Taxes
Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter we update our estimate of the annual effective tax rate, and if our estimated annual tax rate changes, we make a cumulative adjustment in that quarter. Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, are subject to significant volatility due to several factors, including our ability to accurately predict our income (loss) before provision for income taxes in multiple jurisdictions, including the portions of our share-based compensation that will not generate tax benefits, and the effects of acquisitions and the integration of those acquisitions. In addition, our effective tax rate can be more or less volatile based on the amount of income before provision for income taxes. For example, the effect of non-deductible share based compensation expense on our effective tax rate is significantly greater when our income before provision for income taxes is lower.
Our effective tax rate has exceeded the U.S. statutory rate primarily because of the effect of non-deductible share-based compensation and losses arising outside the United States in jurisdictions where we do not receive a tax benefit. These losses were primarily due to the initial start-up costs incurred by our foreign subsidiaries to operate in certain foreign markets, including the costs incurred by those subsidiaries to license, develop, and use our intellectual property. Our effective tax rate in the future will depend on the portion of our profits earned within and outside the United States, which will also be affected by our methodologies for valuing our intellectual property and intercompany transactions.
For the six months ended June 30, 2013, the effect of the non-deductible share-based compensation expense and losses arising outside the United States in jurisdictions where we do not receive a tax benefit was largely offset by the recognition of a non-recurring tax benefit that we recorded in the first quarter of 2013 related to the reinstatement of the federal tax credit for

19


research and development activities applicable to the year ended December 31, 2012.
We are subject to taxation in the United States and various other state and foreign jurisdictions. The material jurisdictions in which we are subject to potential examination include the United States and Ireland. We are under examination by the Internal Revenue Service (IRS) for our 2008, 2009 and 2010 tax years. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations, and we do not anticipate a significant impact to our gross unrecognized tax benefits within the next 12 months related to these years. Our 2011 and subsequent tax years remain subject to examination by the IRS and all tax years starting in 2008 remain subject to examination in Ireland. We remain subject to possible examinations or are undergoing audits in various other jurisdictions that are not material to our financial statements.
Our balances of gross unrecognized tax benefits were $382 million and $164 million as of June 30, 2013 and December 31, 2012, respectively. If the remaining balance of gross unrecognized tax benefits as of June 30, 2013 is realized in a future period, this would result in a tax benefit of $287 million within our provision of income taxes at such time. Our existing tax positions will continue to generate an increase in liabilities in future periods for unrecognized tax benefits. 
Although the timing of the resolution, settlement, and closure of any audit is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years remaining that are subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.
Note 12.
Geographical Information
Revenue by geography is based on the billing address of the marketer or Platform developer. The following tables set forth revenue and long-lived assets by geographic area (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Revenue:
 
 
 
 
 
 
 
United States
$
818

 
$
588

 
$
1,498

 
$
1,124

Rest of the world (1)
995

 
596

 
1,773

 
1,118

Total revenue
$
1,813

 
$
1,184

 
$
3,271

 
$
2,242

 
(1)
No individual country, other than disclosed above, exceeded 10% of our total revenue for any period presented
 
June 30,
2013
 
December 31,
2012
Long-lived assets:
 
 
 
United States
$
2,182

 
$
2,110

Sweden
328

 
220

Rest of the world (1)
67

 
61

Total long-lived assets
$
2,577

 
$
2,391

 
(1)
No individual country, other than disclosed above, exceeded 10% of our total long-lived assets for any period presented

20



Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A. "Risk Factors." For a discussion of limitations in the measurement of certain of our user metrics, see the section entitled "Limitations of Key Metrics and Other Data" in this Quarterly Report on Form 10-Q.
Overview
Our mission is to give people the power to share and make the world more open and connected.
We build products that support our mission by creating utility for users, developers, and marketers:
Users. We enable people who use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them to the people they care about.
Developers. We enable developers to use the Facebook Platform to build applications (apps) and websites that integrate with Facebook to reach our global network of users and to build products that are more personalized, social, and engaging.
Marketers. We enable marketers to engage with more than one billion monthly active users on Facebook or subsets of our users based on information they have chosen to share with us such as their age, location, gender, or interests. We offer marketers a unique combination of reach, relevance, social context, and engagement to enhance the value of their ads.
We generate substantially all of our revenue from advertising and from fees associated with our Payments infrastructure that enables users to purchase virtual and digital goods from our Platform developers. In the second quarter of 2013, we recorded revenue of $1,813 million, income from operations of $562 million and net income of $333 million. In the first six months of 2013, we recorded revenue of $3,271 million, income from operations of $935 million and net income of $552 million.



21


Trends in Our User Metrics
The numbers for our key metrics, our daily active users (DAUs), monthly active users (MAUs), mobile MAUs and average revenue per user (ARPU), and certain other metrics such as mobile DAUs and mobile-only MAUS, do not include Instagram users unless they would otherwise qualify as such users, respectively, based on their other activities on Facebook. In addition, other user engagement metrics do not include Instagram unless otherwise specifically stated.
Daily Active Users (DAUs). We define a daily active user as a registered Facebook user who logged in and visited Facebook through our website or a mobile device, or took an action to share content or activity with his or her Facebook friends or connections via a third-party website that is integrated with Facebook, on a given day. We view DAUs, and DAUs as a percentage of MAUs, as measures of user engagement.
Note: For purposes of reporting DAUs, MAUs, and ARPU by geographic region, Europe includes all users in Russia and Turkey, Asia includes all users in Australia and New Zealand, and Rest of World includes all users in Africa, Latin America, and the Middle East.


22


Worldwide DAUs increased 27% to 699 million on average during June 2013 from 552 million during June 2012. We experienced growth in DAUs across major markets including Brazil, India, and the United States. Overall growth in DAUs was driven by increased mobile usage of Facebook. During the second quarter of 2013, the number of DAUs using personal computers increased modestly compared to the same period in 2012, but in certain key markets such as the United States the number of DAUs using personal computers decreased, while mobile DAUs continued to increase. Worldwide mobile DAUs were 469 million on average during June 2013.
Monthly Active Users (MAUs). We define a monthly active user as a registered Facebook user who logged in and visited Facebook through our website or a mobile device, or took an action to share content or activity with his or her Facebook friends or connections via a third-party website that is integrated with Facebook, in the last 30 days as of the date of measurement. MAUs are a measure of the size of our global active user community, which has grown substantially in the past several years.
    
As of June 30, 2013, we had 1.15 billion MAUs, an increase of 21% from June 30, 2012. Users in India and Brazil represented key sources of growth in the second quarter of 2013 relative to the prior year.

23


Mobile MAUs. We define a mobile MAU as a user who accessed Facebook via a mobile app or via mobile-optimized versions of our website such as m.facebook.com, whether on a mobile phone or tablet such as the iPad, during the period of measurement.
Worldwide mobile MAUs increased 51% to 819 million as of June 30, 2013 from 543 million as of June 30, 2012. In all regions, an increasing number of our MAUs are accessing Facebook through mobile devices, with users in India, Brazil, and Indonesia representing key sources of mobile growth over the second quarter of 2013 as compared to the first quarter of 2013. There were 219 million mobile MAUs who accessed Facebook solely through mobile apps or our mobile website during the month ended June 30, 2013, increasing 16% from 189 million during the month ended March 31, 2013. The remaining 600 million mobile MAUs accessed Facebook from both personal computers and mobile devices during that month. While most of our mobile users also access Facebook through personal computers, we anticipate that the rate of growth in mobile usage will exceed the growth in usage through personal computers for the foreseeable future and that the usage through personal computers may be flat or continue to decline in certain markets, including key developed markets such as the United States, in part due to our focus on developing mobile products to encourage mobile usage of Facebook.


24


Trends in Our Monetization by User Geography
We calculate our revenue by user geography based on our estimate of the geography in which ad impressions are delivered or virtual goods are purchased. We define ARPU as our total revenue in a given geography during a given quarter, divided by the average of the number of MAUs in the geography at the beginning and end of the quarter. Our revenue and ARPU in regions such as United States & Canada and Europe are relatively higher due to the size and maturity of those advertising markets as well as our greater sales presence and the number of payment methods that we make available to marketers and users.
 
Note: Our revenue by user geography in the charts above is geographically apportioned based on our estimation of the geographic location of our users when they perform a revenue-generating activity. This allocation differs from our revenue by geography disclosure in our condensed consolidated financial statements where revenue is geographically apportioned based on the location of the marketer or developer.

25


During the second quarter of 2013, worldwide ARPU was $1.60, an increase of 25% from the second quarter of 2012. Over this period, ARPU increased by approximately 43% in Rest of World and by over 30% in United States & Canada, Asia and Europe. User growth was more rapid in geographies with relatively lower ARPU, such as Asia and Rest of World. We expect that user growth in the future will continue to be higher in those regions where ARPU is relatively lower, such as Asia and Rest of World, such that worldwide ARPU may continue to increase at a slower rate relative to ARPU in any geographic region, or potentially decrease even if ARPU increases in each geographic region.
Components of Results of Operations
Revenue
We generate substantially all of our revenue from advertising and from fees associated with our Payments infrastructure that enables users to purchase virtual and digital goods from our Platform developers.
Advertising. Our advertising revenue is generated by displaying ad products on the Facebook website or mobile app and third-party affiliated websites or mobile apps. Marketers pay for ad products either directly or through their relationships with advertising agencies, based on the number of clicks made by our users, the number of actions taken by our users or the number of impressions delivered. We recognize revenue from the delivery of click-based ads in the period in which a user clicks on the content, and action-based ads in the period in which a user takes the action the marketer contracted for. We recognize revenue from the display of impression-based ads in the contracted period in which the impressions are delivered. Impressions are considered delivered when an ad is displayed to users. The number of ads we show is subject to methodological changes as we continue to evolve our ads business and the structure of our ads products. Whether we count the initial display only or every display of an ad as an impression is dependent on where the ad is displayed. For example, an individual ad in News Feed that is purchased on an impression basis may be displayed to users more than once during a day; however, only the initial display of the ad is considered an impression, regardless of how many times the ad is actually displayed within the News Feed to a particular user.
Payments and other fees. We enable Payments from our users to our Platform developers. Our users can transact and make payments on the Facebook Platform by using credit cards, PayPal or other payment methods available on our website. We receive a fee from our Platform developers when users make purchases from our Platform developers using our Payments infrastructure. We recognize revenue net of amounts remitted to our Platform developers. We have mandated the use of our Payments infrastructure for game apps on Facebook, and fees related to Payments are generated almost exclusively from games. Our other fees revenue consists primarily of user Promoted Posts, our ad serving and measurement products and, to a lesser extent, Facebook Gifts revenue. Such revenue has been immaterial in recent periods.
Cost of Revenue and Operating Expenses
Cost of revenue. Our cost of revenue consists primarily of expenses associated with the delivery and distribution of our products. These include expenses related to the operation of our data centers such as facility and server equipment depreciation, facility and server equipment rent expense, energy and bandwidth costs, support and maintenance costs, and salaries, benefits, and share-based compensation for employees on our operations teams. Cost of revenue also includes credit card and other transaction fees related to processing customer transactions.
Research and development. Research and development expenses consist primarily of salaries, benefits, and share-based compensation for employees on our engineering and technical teams who are responsible for building new products as well as improving existing products. We expense all of our research and development costs as they are incurred.
Marketing and sales. Our marketing and sales expenses consist primarily of salaries, benefits, and share-based compensation for our employees engaged in sales, sales support, marketing, business development, and customer service functions. Our marketing and sales expenses also include user-, developer-, and marketer-facing marketing and promotional expenditures.
General and administrative. Our general and administrative expenses consist primarily of salaries, benefits, and share-based compensation for our executives as well as our legal, finance, human resources, corporate communications and policy, and other administrative employees. In addition, general and administrative expenses include outside consulting fees, legal and accounting services, and facilities and other supporting overhead costs. General and administrative expenses also include legal settlements and amortization of patents we acquired.

26


Results of Operations
The following table set forth our condensed consolidated statements of operations data:   
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(in millions)
Revenue
$
1,813

 
$
1,184

 
$
3,271

 
$
2,242

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
465

 
367

 
878

 
644

Research and development
344

 
705

 
637

 
858

Marketing and sales
269

 
392

 
472

 
535

General and administrative
173

 
463

 
349

 
567

Total costs and expenses
1,251

 
1,927

 
2,336

 
2,604

Income (loss) from operations
562

 
(743
)
 
935

 
(362
)
Interest and other expense, net
(17
)
 
(22
)
 
(37
)
 
(21
)
Income (loss) before (provision for) benefit from income taxes
545

 
(765
)
 
898

 
(383
)
(Provision for) benefit from income taxes
(212
)
 
608

 
(346
)
 
431

Net income (loss)
$
333

 
$
(157
)
 
$
552

 
$
48

Share-based compensation expense included in costs and expenses:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(in millions)
Share-based compensation expense included in costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
$
11

 
$
66

 
$
19

 
$
71

Research and development
151

 
545

 
268

 
605

Marketing and sales
33

 
232

 
57

 
251

General and administrative
29

 
263

 
50

 
282

Total share-based compensation expense
$
224

 
$
1,106

 
$
394

 
$
1,209



27


The following table set forth our condensed consolidated statements of operations data (as a percentage of revenue): 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Revenue
100
 %
 
100
 %
 
100
 %
 
100
 %
Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
26
 %
 
31
 %
 
27
 %
 
29
 %
Research and development
19
 %
 
60
 %
 
19
 %
 
38
 %
Marketing and sales
15
 %
 
33
 %
 
14
 %
 
24
 %
General and administrative
10
 %
 
39
 %
 
11
 %
 
25
 %
Total costs and expenses
69
 %
 
163
 %
 
71
 %
 
116
 %
Income (loss) from operations
31
 %
 
(63
)%
 
29
 %
 
(16
)%
Interest and other expense, net
(1
)%
 
(2
)%
 
(1
)%
 
(1
)%
Income (loss) before (provision for) benefit from income taxes
30
 %
 
(65
)%
 
27
 %
 
(17
)%
(Provision for) benefit from income taxes
(12
)%
 
51
 %
 
(11
)%
 
19
 %
Net income (loss)
18
 %
 
(13
)%
 
17
 %
 
2
 %
Share-based compensation expense included in costs and expenses (as a percentage of revenue): 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Cost of revenue
1
%
 
6
%
 
1
%
 
3
%
Research and development
8

 
46

 
8

 
27

Marketing and sales
2

 
20

 
2

 
11

General and administrative
2

 
22

 
2

 
13

Total share-based compensation expense
12
%
 
93
%
 
12
%
 
54
%
Three and Six Months Ended June 30, 2013 and 2012
Revenue 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2013
 
2012
 
%
change
 
2013
 
2012
 
%
change
 
(in millions, except for percentages)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Advertising
$
1,599

 
$
992

 
61
%
 
$
2,844

 
$
1,864

 
53
%
Payments and other fees
214

 
192

 
11
%
 
427

 
378

 
13
%
Total revenue
$
1,813

 
$
1,184

 
53
%
 
$
3,271

 
$
2,242

 
46
%
Revenue in the second quarter and the first six months of 2013 increased $629 million, or 53%, and $1,029 million, or 46%, respectively, compared to the same periods in 2012. The increases were due primarily to increases in advertising revenue.
Advertising revenue increased $607 million, or 61%, and $980 million, or 53%, in the second quarter and the first six months of 2013, respectively, compared to the same periods in 2012. Advertising revenue grew due to a 43% and 41% increase in the number of ads delivered during the second quarter and the first six months of 2013, respectively, and a 13% and 8% increase in the average price per ad as compared to those same periods in 2012. The most important factor driving advertising revenue growth in these periods was an increase in revenue from ads in News Feed on both mobile devices and personal computers. News Feed ads are displayed more prominently, have significantly higher levels of engagement and a higher price per ad relative to our other ad placements. For the second quarter and the first six months of 2013, we estimate that advertising revenue from News Feed ads on mobile devices represented approximately 41% and 36%, respectively, of total advertising revenue, as compared with approximately 3% and 1% in the same periods in 2012. Other factors that influenced our advertising revenue growth and advertising

28


price and volume trends in these periods included: (i) an increase in the number of marketers actively advertising on Facebook which we believe increased demand for our ads; (ii) 27% growth in average DAUs and 21% growth in MAUs from June 30, 2012 to June 30, 2013, which increased the number of ads we delivered; and (iii) other product changes, including our decision in the fourth quarter of 2012 to lower our market reserve price, i.e. the minimum price threshold accepted in our ads auction. We believe the reserve price change significantly increased the number of ads delivered and reduced the average price per ad, and overall had a modest positive effect on revenue in the 2013 periods.
Payments and other fees revenue in the second quarter and the first six months of 2013 increased $22 million, or 11%, and $49 million, or 13%, respectively, compared to the same periods in 2012. The increase in Payments and other fees revenue is a result of increased Payments revenue from games played on Facebook on personal computers, and to a lesser extent, the inclusion of other fees revenue in 2013 from user Promoted Posts, our ad serving and measurement products, and Facebook Gifts.
Cost of revenue
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2013
 
2012
 
%
change
 
2013
 
2012
 
%
change
 
(in millions, except for percentages)
Cost of revenue
$
465

 
$
367

 
27
%
 
$
878

 
$
644

 
36
%
Percentage of revenue
26
%
 
31
%
 
 
 
27
%
 
29
%
 
 
Cost of revenue in the second quarter and the first six months of 2013 increased $98 million, or 27%, and $234 million, or 36%, respectively, compared to the same periods in 2012. The increases in both periods were primarily due to $57 million and $65 million of lease abandonment expense recognized in the second quarter and the first six months of 2013 resulting from exiting certain leased data centers due to the migration of operations to our own data centers. In addition, operational expenses related to expanding our own data centers also contributed to the increases in cost of revenue, including $58 million and $145 million increases in depreciation for the second quarter and the first six months of 2013, respectively. These increases were partially offset by $55 million and $52 million decreases in share-based compensation expense for the second quarter and the first six months of 2013, respectively, compared to the same periods in 2012 mainly due to the recognition of expense in those prior periods related to RSUs granted prior to January 1, 2011 (Pre-2011 RSUs) as a result of our IPO in May 2012.
Research and development 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2013
 
2012
 
%
change

 
2013
 
2012
 
%
change

 
(in millions, except for percentages)
Research and development
$
344

 
$
705

 
(51
)%
 
$
637

 
$
858

 
(26
)%
Percentage of revenue
19
%
 
60
%
 
 
 
19
%
 
38
%
 
 
Research and development expenses in the second quarter and the first six months of 2013 decreased $361 million, or 51%, and $221 million, or 26%, respectively, compared to the same periods in 2012. The decreases were primarily due to $394 million and $337 million decreases in share-based compensation expense for the second quarter and the first six months of 2013, respectively, compared to the same periods in 2012 mainly due to the recognition of expense in those prior periods related to Pre-2011 RSUs as a result of our IPO in May 2012. These decreases were partially offset by increases in payroll and benefits expense resulting from a 58% growth in employee headcount from June 30, 2012 to June 30, 2013 in engineering and other technical functions. This investment supported our efforts to improve existing products and build new products for users, developers, and marketers.

29


Marketing and sales 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2013
 
2012
 
%
change
 
2013
 
2012
 
%
change
 
(in millions, except for percentages)
Marketing and sales
$
269

 
$
392

 
(31)%
 
$
472

 
$
535

 
(12)%
Percentage of revenue
15
%
 
33
%
 
 
 
14
%
 
24
%
 
 
Marketing and sales expenses in the second quarter and the first six months of 2013 decreased $123 million, or 31%, and $63 million, or 12%, compared to the same periods in 2012. The decreases were primarily due to $199 million and $194 million decreases in share-based compensation expense for the second quarter and the first six months of 2013, respectively, compared to the same periods in 2012 mainly due to the recognition of expense in those prior periods related to Pre-2011 RSUs as a result of our IPO in May 2012. These decreases were partially offset by $54 million and $73 million increases in our user-, developer-, and marketer-facing marketing expenses for the second quarter and the first six months of 2013, respectively, and by increases in payroll and benefits expenses resulting from a 18% increase in employee headcount from June 30, 2012 to June 30, 2013 to support global sales, business development and customer service.
General and administrative 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2013
 
2012
 
%
change
 
2013
 
2012
 
%
change
 
(in millions, except for percentages)
General and administrative
$
173

 
$
463

 
(63
)%
 
$
349

 
$
567

 
(38
)%
Percentage of revenue
10
%
 
39
%
 
 
 
11
%
 
25
%
 
 
General and administrative expenses in the second quarter and the first six months of 2013 decreased $290 million, or 63%, and $218 million, or 38%, respectively, compared to the same periods in 2012. The decreases were primarily due to $234 million and $232 million decreases in share-based compensation expense for the second quarter and the first six months of 2013, respectively, compared to the same periods in 2012 mainly due to the recognition of expense in those prior periods related to Pre-2011 RSUs as a result of our IPO in May 2012. The decreases were partially offset by increases in amortization of acquired patents.
Interest and other expense, net
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2013
 
2012
 
%
change
 
2013
 
2012
 
%
change
 
(in millions, except for percentages)
Interest expense
$
(14
)
 
$
(10
)
 
40
 %
 
$
(29
)
 
$
(24
)
 
21
%
Other (expense) income, net
(3
)
 
(12
)
 
(75
)%
 
(8
)
 
3

 
367
%
Interest and other expense, net
$
(17
)
 
$
(22
)
 
(23
)%
 
$
(37
)
 
$
(21
)
 
76
%
Interest and other expense, net decreased $5 million in the second quarter of 2013 and increased $16 million in the first six months of 2013 compared to the same periods in 2012. Changes in other (expense) income, net in the second quarter of 2013 compared to the same period in 2012 were primarily due to a decrease in foreign exchange loss resulting from the periodic re-measurement of our foreign currency balances and an increase in interest income resulting from higher invested cash balances. Changes in other (expense) income, net in the first six months of 2013 compared to the same period in 2012 were primarily due to an increase in foreign exchange loss resulting from the periodic re-measurement of our foreign currency balances, offset by an increase in interest income resulting from higher invested cash balances. Interest expense increased by $4 million and $5 million in the second quarter and the first six months of 2013, respectively, primarily due to interest on the $1.5 billion term loan that was drawn down in the fourth quarter of 2012.

30


Provision for income taxes
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2013
 
2012
 
%
change
 
2013
 
2012
 
%
change
 
(in millions, except for percentages)
(Provision for) benefit from income taxes
$
(212
)
 
$
608

 
NM
 
$
(346
)
 
$
431

 
NM
Effective tax rate
39
%
 
79
%
 
 
 
39
%
 
113
%
 
 
Our provision for income taxes in the second quarter and the first six months of 2013 was $212 million and $346 million, respectively, compared to a benefit from income taxes of $608 million and $431 million in the second quarter and the first six months of 2012, respectively. The change in our provision for income taxes is primarily due to an increase in income before income taxes in the second quarter and the first six months of 2013.
Our effective tax rate decreased in the second quarter and the first six months of 2013 primarily due to the increase in income before income taxes and a reduction in the amount of non-deductible share-based compensation expense that was recognized compared to the same periods in 2012. We also recorded a non-recurring tax benefit in the first quarter of 2013 related to the reinstatement of the federal tax credit for research and development activities applicable to the fiscal year ended December 31, 2012.
Our effective tax rate has exceeded the U.S. statutory rate primarily because of the impact of non-deductible share-based compensation expense and losses arising outside the United States in jurisdictions where we do not receive a tax benefit. These losses were primarily due to the initial start-up costs incurred by our foreign subsidiaries to operate in certain foreign markets, including the costs incurred by those subsidiaries to license, develop, and use our intellectual property. Our effective tax rate in the future will depend on the portion of our profits earned within and outside the United States, which will also be affected by our methodologies for valuing our intellectual property and intercompany transactions.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, marketable securities, and cash generated from operations. Cash and cash equivalents and marketable securities consist primarily of cash on deposit with banks and investments in money market funds and U.S. government and U.S. government agency securities. Cash and cash equivalents and marketable securities were $10.3 billion as of June 30, 2013, an increase of $626 million from December 31, 2012, primarily due to $2.0 billion of cash generated from operations which included the receipt of an income tax refund of $419 million. This increase was offset by $595 million used for purchases of property and equipment, $558 million used for tax payments related to net share settlement of equity awards, and $221 million used for acquisitions of businesses and other assets. If we continue to net settle equity awards, we will use additional cash to pay our tax withholding obligations in connection with such settlements. We currently anticipate that our available funds, credit facilities, and cash flow from operations will be sufficient to meet our operational cash needs for the foreseeable future.
We have an unsecured five-year revolving credit facility that allows us to borrow up to $5 billion at London Interbank Offered Rate (LIBOR) plus 1.0%, as well as an annual commitment fee of 0.10% on the daily undrawn balance. As of June 30, 2013, no amounts were drawn down and we were in compliance with the covenants under this credit facility.
We also have a three-year unsecured term loan facility (Amended and Restated Term Loan) expiring in October 2015 that allows us to borrow up to $1.5 billion with interest payable on the borrowed amounts set at LIBOR plus 1.0%, as well as an annual commitment fee of 0.10% on the daily undrawn balance of the facility. We fully drew down the $1.5 billion facility which will become due and payable in full on October 25, 2015. We have the option to repay this facility at any time prior to such date. As of June 30, 2013, we were in compliance with the covenants in the Amended and Restated Term Loan.
In connection with the draw down of the Amended and Restated Term Loan, we entered into a $1.5 billion interest rate swap agreement that converts the one-month LIBOR rate on the corresponding notional amount of debt to a fixed interest rate of 1.46% to hedge our exposure to interest rate fluctuation. This interest rate swap has a maturity date of October 25, 2015.
During the first six months of 2013, we received a $419 million refund from the income tax loss carryback to 2010 and 2011.
As of June 30, 2013, $699 million of the $10.3 billion in cash and cash equivalents and marketable securities was held by our foreign subsidiaries. We have provided for the additional taxes that would be due if we repatriated these funds for use in our operations in the United States.

31


Cash Provided by Operating Activities
Cash flow from operating activities during the first six months of 2013 primarily consisted of net income, adjusted for certain non-cash items, including total depreciation and amortization of $463 million and share-based compensation expense of $394 million, and a reduction in income tax refundable of $444 million. The increase in cash flow from operating activities during the first six months of 2013 compared to the same period in 2012 was mainly due to an increase in net income, as adjusted for certain non-cash items, and the receipt of an income tax refund of $419 million.
Cash Used in Investing Activities
Cash used in investing activities during the first six months of 2013 primarily resulted from $595 million for capital expenditures related to the purchase of servers, networking equipment, storage infrastructure, and the construction of data centers as well as $221 million for acquisitions of businesses and other assets, such as patents. The decrease in cash used in investing activities during the first six months of 2013 compared to the same period in 2012 was mainly due to decreased net purchases of marketable securities from the same period in 2012 when we invested the proceeds from our IPO. In addition, we used less cash to acquire businesses and other assets and had lower capital expenditures in the first six months of 2013 compared to the same period in 2012.
We anticipate making capital expenditures in 2013 of approximately $1.6 billion.
Cash (Used in) Provided by Financing Activities
Cash used in financing activities was $593 million for the first six months of 2013 primarily resulted from $558 million of tax payments related to the net share settlement of equity awards. Because our RSUs granted on or after January 1, 2011 only began to settle in 2013, the total tax payments of $558 million included approximately $185 million related to RSUs that vested prior to 2013 but were not settled until the first quarter of 2013.
Cash provided by financing activities was $7.09 billion for the first six months of 2012 primarily related to $6.76 billion in net proceeds from our IPO.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of June 30, 2013.
Contractual Obligations
There were no material changes in our commitments under contractual obligations, as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
Contingencies
We are involved in claims, lawsuits, government investigations, and proceedings. We record a provision for a liability when we believe that it is both probable that a liability has been incurred, and that the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. Such legal proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to be incorrect, it could have a material impact on our results of operations, financial position, and cash flows.
See Note 9 in the notes to the condensed consolidated financial statements included in Part I, Item 1 and "Legal Proceedings" contained in Part II, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding contingencies.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that the assumptions and estimates associated with revenue recognition for Payments and other fees, income taxes and share-based compensation have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

32


There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, including changes to foreign currency exchange rates, interest rates, and inflation.
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the Euro. In general, we are a net receiver of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, will negatively affect our revenue and other operating results as expressed in U.S. dollars.
We have experienced and will continue to experience fluctuations in our net income (loss) as a result of transaction gains or losses related to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. At this time we have not entered into, but in the future we may enter into, derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the effect hedging activities would have on our results of operations. We recognized foreign currency losses of $8 million and $19 million in the three months ended June 30, 2013 and 2012, respectively, and of $13 million and $3 million in the six months ended June 30, 2013 and 2012, respectively.
Interest Rate Sensitivity
Our exposure to changes in interest rates relates primarily to interest earned and market value on our cash and cash equivalents and marketable securities and interest paid on our long-term debt.
Our cash and cash equivalents and marketable securities consist of cash, certificates of deposit, time deposits, money market funds and U.S. government and U.S. government agency securities. Our investment policy and strategy are focused on preservation of capital and supporting our liquidity requirements. Changes in U.S. interest rates affect the interest earned on our cash and cash equivalents and marketable securities and the market value of those securities. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately $74 million and $55 million in the market value of our available-for-sale debt securities as of June 30, 2013 and December 31, 2012, respectively. Any realized gains or losses resulting from such interest rate changes would only occur if we sold the investments prior to maturity.
Our long-term debt consists of the $1.5 billion draw down on our three-year unsecured term loan facility that bears variable interest at 1-month LIBOR plus 1.0%. As our risk management objective is to mitigate the risk of changes in cash flows attributable to changes in the designated 1-month LIBOR for the loan, we have entered into an interest rate swap agreement for the exact notional amount of $1.5 billion and a fixed interest rate of 1.46% at the same time the term loan was drawn down to hedge this exposure. Both the term loan and interest rate swap have a maturity date of October 25, 2015. Changes in the cash flows of the interest rate swap are expected to exactly offset the changes in cash flows attributable to fluctuations in the 1-month LIBOR based interest payments on the long-term debt. The net effect of this swap agreement is to convert the variable interest rate to a fixed rate of 1.46%.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In

33


addition, the design of disclo