10-Q 1 fb-9302013x10q.htm 10-Q FB-9.30.2013-10Q
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 September 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
1,874,048,211 shares outstanding as of October 29, 2013
Class B Common Stock $0.000006 par value
580,779,919 shares outstanding as of October 29, 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 between approximately 4.3% and 7.9% of our worldwide MAUs during the nine months ended September 30, 2013. 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. During the nine months ended September 30, 2013, for example, we estimate user-misclassified accounts may have represented between approximately 0.8% and 2.1% of our worldwide MAUs and undesirable accounts may have represented between approximately 0.4% and 1.2% 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 United Kingdom and higher in developing markets such as India 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. Due to inherent variability in such estimates at particular dates of measurement, we disclose these estimates as a range over a recent period.
          
Our data limitations may affect our understanding of certain details of our business. For example, while user-provided data indicates a decline in usage among younger users, this age data is unreliable because a disproportionate number of our younger users register with an inaccurate age. We have worked with third parties to develop models to analyze user data by age in the United States. These models suggest that usage by U.S. teens overall continues to be stable, but that there has recently been a decline in DAU among younger U.S. teens. The data and models we are using are not precise and our understanding of usage by age group may not be complete.
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)
 
September 30,
2013
 
December 31,
2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
3,100

 
$
2,384

Marketable securities
6,228

 
7,242

Accounts receivable, net of allowances for doubtful accounts of $31 and $22 as of September 30, 2013 and December 31, 2012, respectively
872

 
719

Income tax refundable
7

 
451

Prepaid expenses and other current assets
342

 
471

Total current assets
10,549

 
11,267

Property and equipment, net
2,685

 
2,391

Goodwill and intangible assets, net
1,609

 
1,388

Other assets
90

 
57

Total assets
$
14,933

 
$
15,103

Liabilities and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
36

 
$
65

Platform partners payable
171

 
169

Accrued expenses and other current liabilities
453

 
423

Deferred revenue and deposits
36

 
30

Current portion of capital lease obligations
288

 
365

Total current liabilities
984

 
1,052

Capital lease obligations, less current portion
287

 
491

Long-term debt

 
1,500

Other liabilities
614

 
305

Total liabilities
1,885

 
3,348

Stockholders' equity:
 
 
 
Common stock, $0.000006 par value; 5,000 million Class A shares authorized, 1,869 million and 1,671 million shares issued and outstanding, including 6 million and 2 million outstanding shares subject to repurchase as of September 30, 2013 and December 31, 2012, respectively; 4,141 million Class B shares authorized, 584 million and 701 million shares issued and outstanding, including 7 million and 11 million outstanding shares subject to repurchase as of September 30, 2013 and December 31, 2012, respectively

 

Additional paid-in capital
10,399

 
10,094

Accumulated other comprehensive income
13

 
2

Retained earnings
2,636

 
1,659

Total stockholders' equity
13,048

 
11,755

Total liabilities and stockholders' equity
$
14,933

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenue
$
2,016

 
$
1,262

 
$
5,286

 
$
3,504

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
507

 
322

 
1,384

 
967

Research and development
369

 
244

 
1,006

 
1,102

Marketing and sales
233

 
168

 
704

 
703

General and administrative
171

 
151

 
520

 
717

Total costs and expenses
1,280

 
885

 
3,614

 
3,489

Income from operations
736

 
377

 
1,672

 
15

Interest and other income (expense), net:
 
 
 
 
 
 
 
Interest expense
(21
)
 
(11
)
 
(50
)
 
(35
)
Other income, net
11

 
6

 
2

 
9

Income (loss) before provision for income taxes
726

 
372

 
1,624

 
(11
)
Provision for income taxes
301

 
431

 
647

 

Net income (loss)
$
425

 
$
(59
)
 
$
977

 
$
(11
)
Less: Net income attributable to participating securities
3

 

 
6

 

Net income (loss) attributable to Class A and Class B common stockholders
$
422

 
$
(59
)
 
$
971

 
$
(11
)
Earnings (loss) per share attributable to Class A and Class B common stockholders:
 
 
 
 
 
 
 
Basic
$
0.17

 
$
(0.02
)
 
$
0.40

 
$
(0.01
)
Diluted
$
0.17

 
$
(0.02
)
 
$
0.39

 
$
(0.01
)
Weighted average shares used to compute earnings (loss) per share attributable to Class A and Class B common stockholders:
 
 
 
 
 
 
 
Basic
2,430

 
2,420

 
2,408

 
1,884

Diluted
2,528

 
2,420

 
2,504

 
1,884

Share-based compensation expense included in costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
$
12

 
$
8

 
$
31

 
$
79

Research and development
164

 
114

 
432

 
719

Marketing and sales
34

 
28

 
91

 
279

General and administrative
29

 
29

 
79

 
311

Total share-based compensation expense
$
239

 
$
179

 
$
633

 
$
1,388

See Accompanying Notes to Condensed Consolidated Financial Statements.


6


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited) 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Net income (loss)
$
425

 
$
(59
)
 
$
977

 
$
(11
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
38

 
21

 
7

 
(1
)
Change in unrealized gain/loss on available-for-sale investments, net of tax
4

 
2

 
1

 
1

Change in unrealized gain/loss on derivative, net of tax
(1
)
 

 
3

 

Comprehensive income (loss)
$
466

 
$
(36
)
 
$
988

 
$
(11
)
See Accompanying Notes to Condensed Consolidated Financial Statements.

7


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Nine Months Ended September 30,
 
2013
 
2012
Cash flows from operating activities
 
 
 
Net income (loss)
$
977

 
$
(11
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
737

 
425

Lease abandonment expense
108

 
7

Loss on disposal or write-off of equipment
39

 
8

Share-based compensation
633

 
1,388

Deferred income taxes
21

 
(434
)
Tax benefit from share-based award activity
277

 
854

Excess tax benefit from share-based award activity
(285
)
 
(854
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(145
)
 
(90
)
Income tax refundable
444

 
(567
)
Prepaid expenses and other current assets
(11
)
 
24

Other assets
(35
)
 

Accounts payable
(17
)
 
20

Platform partners payable
2

 
(16
)
Accrued expenses and other current liabilities
(105
)
 
155

Deferred revenue and deposits
6

 
(5
)
Other liabilities
345

 
27

Net cash provided by operating activities
2,991

 
931

Cash flows from investing activities
 
 
 
Purchases of property and equipment
(879
)
 
(1,037
)
Purchases of marketable securities
(4,364
)
 
(8,590
)
Sales of marketable securities
2,433

 
571

Maturities of marketable securities
2,954

 
2,413

Investments in non-marketable equity securities
(1
)
 
(3
)
Acquisitions of businesses, net of cash acquired, and purchases of intangible assets
(237
)
 
(911
)
Change in restricted cash and deposits
4

 
(2
)
Net cash used in investing activities
(90
)
 
(7,559
)
Cash flows from financing activities
 
 
 
Net proceeds from issuance of common stock

 
6,760

Taxes paid related to net share settlement of equity awards
(706
)
 

Proceeds from exercise of stock options
20

 
9

Repayment of long-term debt
(1,500
)
 

Proceeds from sale and lease-back transactions

 
205

Principal payments on capital lease obligations
(291
)
 
(231
)
Excess tax benefit from share-based award activity
285

 
854

Net cash (used in) provided by financing activities
(2,192
)
 
7,597

Effect of exchange rate changes on cash and cash equivalents
7

 
(3
)
Net increase in cash and cash equivalents
716

 
966

Cash and cash equivalents at beginning of period
2,384

 
1,512

Cash and cash equivalents at end of period
$
3,100

 
$
2,478

See Accompanying Notes to Condensed Consolidated Financial Statements.

8


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Nine Months Ended September 30,
 
2013
 
2012
Supplemental cash flow data
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
33

 
$
30

Income taxes
$
61

 
$
184

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
$
31

 
$
(80
)
Property and equipment acquired under capital leases
$
11

 
$
251

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

 
$
275

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 nine months ended September 30, 2013, we completed several business acquisitions for total consideration of $260 million, consisting of approximately $184 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 approximately 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 nine months ended September 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 nine months ended September 30, 2013, including the related estimated useful lives, where applicable:
 
in millions
 
Estimated useful lives (in years)
Amortizable intangible assets:
 
 
 
Acquired technology
$
68

 
3 - 7
Tradename and other
26

 
2 - 10
Deferred tax liabilities
(9
)
 
 
Net assets acquired
$
85

 
 
Goodwill
175

 
 
Total fair value consideration
$
260

 
 
Goodwill generated from all business acquisitions completed during the nine months ended September 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 nine months ended September 30, 2013, we also acquired $58 million of patents and other intangible assets. Patents acquired during the nine months ended September 30, 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 to Class A common stock. 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 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

11


diluted EPS calculation. RSUs granted on or 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.
We have excluded 15 million Post-2011 RSUs from the EPS calculation for the nine months ended September 30, 2013 because the impact would be anti-dilutive. Shares excluded from the calculation were not material for the three months ended September 30, 2013. For the three and nine months ended September 30, 2012 in which we reported a net loss, we did not allocate any loss to participating securities in the basic and diluted EPS computation. Additionally, we did not include employee stock options, unvested RSUs, and shares subject to repurchase in our calculation of diluted EPS for these periods because the impact of these awards would have been anti-dilutive.
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 September 30,
 
Nine Months Ended September 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)
$
320

 
$
105

 
$
(19
)
 
$
(40
)
 
$
717

 
$
260

 
$
(3
)
 
$
(8
)
Less: Net income attributable to participating securities
2

 
1

 

 

 
4

 
2

 

 

Net income (loss) attributable to common stockholders
$
318

 
$
104

 
$
(19
)
 
$
(40
)
 
$
713

 
$
258

 
$
(3
)
 
$
(8
)
Denominator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
1,833

 
611

 
794

 
1,632

 
1,773

 
649

 
431

 
1,457

Less: Shares subject to repurchase
6

 
8

 
1

 
5

 
5

 
9

 
1

 
3

Number of shares used for basic EPS computation
1,827

 
603

 
793

 
1,627

 
1,768

 
640

 
430

 
1,454

Basic EPS
$
0.17

 
$
0.17

 
$
(0.02
)
 
$
(0.02
)
 
$
0.40

 
$
0.40

 
$
(0.01
)
 
$
(0.01
)
Diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
$
318

 
$
104

 
$
(19
)
 
$
(40
)
 
$
713

 
$
258

 
$
(3
)
 
$
(8
)
Reallocation of net income attributable to participating securities
3

 

 

 

 
6

 

 

 

Reallocation of net income (loss) as a result of conversion of Class B to Class A common stock
104

 

 
(40
)
 

 
258

 

 
(8
)
 

Reallocation of net income to Class B common stock

 
13

 

 

 

 
29

 

 

Net income (loss) attributable to common stockholders for diluted EPS
$
425

 
$
117

 
$
(59
)
 
$
(40
)
 
$
977

 
$
287

 
$
(11
)
 
$
(8
)
Denominator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares used for basic EPS computation
1,827

 
603

 
793

 
1,627

 
1,768

 
640

 
430

 
1,454

Conversion of Class B to Class A common stock
603

 

 
1,627

 

 
640

 

 
1,454

 

Weighted average effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee stock options
59

 
59

 

 

 
69

 
69

 

 

RSUs
33

 
33

 

 

 
21

 
21

 

 

Shares subject to repurchase
6

 
6

 

 

 
6

 
6

 

 

Number of shares used for diluted EPS computation
2,528

 
701

 
2,420

 
1,627

 
2,504

 
736

 
1,884

 
1,454

Diluted EPS
$
0.17

 
$
0.17

 
$
(0.02
)
 
$
(0.02
)
 
$
0.39

 
$
0.39

 
$
(0.01
)
 
$
(0.01
)

13


Note 4.
Cash, Cash Equivalents and Marketable Securities
The following table sets forth the cash, cash equivalents and marketable securities (in millions):
 
September 30, 2013
 
December 31, 2012
Cash and cash equivalents:
 
 
 
Cash
$
898

 
$
1,513

Money market funds
2,202

 
871

Total cash and cash equivalents
3,100

 
2,384

Marketable securities:
 
 
 
U.S. government securities
4,157

 
5,165

U.S. government agency securities
2,071

 
2,077

Total marketable securities
6,228

 
7,242

Total cash, cash equivalents and marketable securities
$
9,328

 
$
9,626

The gross unrealized gains or losses on our marketable securities as of September 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 September 30, 2013 and December 31, 2012.
The following table classifies our marketable securities by contractual maturities (in millions):  
 
September 30, 2013
Due in one year
$
3,272

Due in one to two years
2,956

Total
$
6,228


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
September 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
$
2,202

 
$
2,202

 
$

 
$

Marketable securities:
 
 
 
 
 
 
 
U.S. government securities
4,157

 
4,157

 

 

U.S. government agency securities
2,071

 
2,071

 

 

Total cash equivalents and marketable securities
$
8,430

 
$
8,430

 
$

 
$

 
 
 
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

 
$

In August 2013, we settled our Level 3 contingent consideration liability and terminated our Level 2 derivative financial instrument related to our interest rate swap agreement. See Note 8 in these notes to the condensed consolidated financial statements for additional information on the termination of our interest swap agreement.

15


Note 6.
Property and Equipment
Property and equipment consisted of the following (in millions): 
 
September 30,
2013
 
December 31,
2012
Network equipment
$
2,245

 
$
1,912

Land
41

 
36

Buildings
975

 
594

Leasehold improvements
198

 
194

Computer software, office equipment and other
107

 
93

Construction in progress
255

 
444

Total
3,821

 
3,273

Less: Accumulated depreciation
(1,136
)
 
(882
)
Property and equipment, net
$
2,685

 
$
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, Iowa and Sweden and ongoing construction to expand our corporate headquarters in Menlo Park, California. 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 nine months ended September 30, 2013 are as follows (in millions): 
Balance as of December 31, 2012
$
587

Goodwill acquired
175

Balance as of September 30, 2013
$
762

Intangible assets consisted of the following (in millions):
 
 
 
September 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
 
$
739

 
$
(120
)
 
$
619

 
$
684

 
$
(53
)
 
$
631

Acquired technology
2 - 10
 
201

 
(55
)
 
146

 
133

 
(32
)
 
101

Tradename and other
2 - 10
 
123

 
(41
)
 
82

 
94

 
(25
)
 
69

Total
 
 
$
1,063

 
$
(216
)
 
$
847

 
$
911

 
$
(110
)
 
$
801

Amortization expense of intangible assets was $37 million and $106 million for the three and nine months ended September 30, 2013, respectively, and $31 million and $44 million for the three and nine months ended September 30, 2012, respectively.

16


As of September 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
$
37

2014
145

2015
136

2016
124

2017
106

2018
72

Thereafter
227

 
$
847

Note 8.
Long-term Debt
In August 2013, we fully repaid the $1.5 billion outstanding principal balance of our three-year unsecured term loan facility.
In connection with our termination of the unsecured term loan facility, we also terminated our $1.5 billion interest rate swap agreement which converted the one-month LIBOR rate on the corresponding notional amount of debt to a fixed interest rate to hedge our exposure to interest rate fluctuation. We have reclassified all amounts related to the interest rate swap in AOCI to interest expense. For the three and nine months ended September 30, 2013, the amount in AOCI reclassified to interest expense was not material. The realized gain as a result of the termination of our interest rate swap was also not material.
Concurrently, we also terminated our unsecured five-year revolving credit facility that allowed us to borrow up to $5 billion. We had not drawn down on this facility.
In August 2013, in connection with the termination of these facilities, we entered into a five-year senior unsecured revolving credit facility (2013 Revolving Credit Facility) that allows us to borrow up to $6.5 billion to fund working capital and general corporate purposes 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 paid origination fees at closing of the 2013 Revolving Credit Facility, which fees are being amortized over the term of the facility. Any amounts outstanding under this facility will be due and payable on August 15, 2018. As of September 30, 2013, no amounts had been drawn down and we were in compliance with the covenants under this facility.
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 nine months ended September 30, 2013, we recognized lease abandonment expense of $43 million and $108 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 $28 million and $101 million for the three and nine months ended September 30, 2013, respectively, and $50 million and $151 million for the three and nine months ended September 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. On October 8, 2013, the court heard 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.
In the opinion of management, there was not at least a reasonable possibility that 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.
We are also party to various legal proceedings and claims that arise in the ordinary course of business. Among these pending legal matters, one case is currently scheduled for trial in the near future. Rembrandt Social Media, LP v. Facebook, Inc., et al., is scheduled to begin trial on December 10, 2013, in the U.S. District Court for the Eastern District of Virginia. In the Rembrandt case, the plaintiff alleges that we infringe certain patents held by the plaintiff. The plaintiff is seeking significant monetary damages and equitable relief.

We believe the claims made by the plaintiff in the Rembrandt case are without merit, and we intend to defend ourselves vigorously. Because the outcome of litigation is inherently uncertain, we believe it is reasonably possible that we may incur a loss in connection with this matter. However, we do not believe such a loss is probable and we are unable to estimate a reasonable range of loss, if any, that could result were there to be an adverse final decision, and we therefore have not accrued a liability for this matter. If an unfavorable outcome were to occur in this case, it is possible that the impact could be material to our results of operations in the period(s) in which any such outcome becomes probable and estimable.
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 September 30, 2013, the option had been partially exercised and the remaining option to purchase 60,000,000 shares is outstanding and fully vested. This option will expire on November 7, 2015. 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 nine months ended September 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
(38,293
)
 
0.54

 
 
 
 
Stock options forfeited/cancelled
(216
)
 
1.85

 
 
 
 
Balance as of September 30, 2013
84,312

 
$
0.99

 
2.89
 
$
4,152

Stock options vested and expected to vest as of September 30, 2013
84,287

 
$
0.99

 
2.89
 
$
4,151

Stock options exercisable as of September 30, 2013
78,593

 
$
0.37

 
2.62
 
$
3,920

(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 $50.23 on September 30, 2013.
The aggregate intrinsic value of the options exercised was $586 million and $1.17 billion for the three and nine months ended September 30, 2013, respectively, and $10 million and $2.99 billion for the three and nine months ended September 30, 2012, respectively.
The following table summarizes the activities for our unvested RSUs for the nine months ended September 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
49,048

 
28.14

Vested
(39,523
)
 
16.37

Forfeited
(11,375
)
 
24.11

Unvested at September 30, 2013
111,194

 
$
25.87

As of September 30, 2013, there was $2.85 billion of unrecognized share-based compensation expense, of which $2.53 billion is related to RSUs and $320 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.

19


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 jurisdictions, 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 nine months ended September 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 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 anticipated to be material to our financial statements.
Our balances of gross unrecognized tax benefits were $751 million and $164 million as of September 30, 2013 and December 31, 2012, respectively. If the remaining balance of gross unrecognized tax benefits as of September 30, 2013 is realized in a future period, this would result in a tax benefit of $450 million within our provision of income taxes at such time. Our existing tax positions will continue to generate an increase in unrecognized tax benefits in future periods. 
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.

20


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 September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenue:
 
 
 
 
 
 
 
United States
$
940

 
$
665

 
$
2,438

 
$
1,789

Rest of the world (1)
1,076

 
597

 
2,848

 
1,715

Total revenue
$
2,016

 
$
1,262

 
$
5,286

 
$
3,504

 
(1)
No individual country, other than disclosed above, exceeded 10% of our total revenue for any period presented
 
September 30,
2013
 
December 31,
2012
Long-lived assets:
 
 
 
United States
$
2,206

 
$
2,110

Sweden
395

 
220

Rest of the world (1)
84

 
61

Total long-lived assets
$
2,685

 
$
2,391

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

21



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 third quarter of 2013, we recorded revenue of $2,016 million, income from operations of $736 million and net income of $425 million. In the first nine months of 2013, we recorded revenue of $5,286 million, income from operations of $1,672 million and net income of $977 million.



22


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 or app 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.

23



Worldwide DAUs increased 25% to 728 million on average during September 2013 from 584 million during September 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. On average during September 2013, the number of DAUs using personal computers decreased modestly compared to the same period in 2012. Worldwide mobile DAUs were 507 million on average during September 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 or app 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.
    
As of September 30, 2013, we had 1.19 billion MAUs, an increase of 18% from September 30, 2012. Users in India and Brazil represented key sources of growth in the third quarter of 2013 relative to the prior year.

24


Mobile MAUs. We define a mobile MAU as a user who accessed Facebook via a mobile app or via versions of our website such as m.facebook.com, whether on a mobile phone or tablet, during the period of measurement.
Worldwide mobile MAUs increased 45% to 874 million as of September 30, 2013 from 604 million as of September 30, 2012. In all regions, an increasing number of our MAUs are accessing Facebook through mobile devices, with users in India, Brazil, and the United States representing key sources of mobile growth over the third quarter of 2013 as compared to the same period in 2012. There were 254 million mobile MAUs who accessed Facebook solely through mobile apps or our mobile website during the month ended September 30, 2013, increasing 102% from 126 million during the same period in 2012. The remaining 620 million mobile MAUs accessed Facebook from both personal computers and mobile devices during September 2013. While most of our mobile users also access Facebook through personal computers, we anticipate that the rate of growth in mobile usage will continue to be the primary driver of our user growth for the foreseeable future and that usage through personal computers may be flat or decline worldwide, including in key markets such as the United States and other developed markets in Europe and Asia. This is in part due to our focus on developing mobile products to encourage mobile usage of Facebook.


25


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 and digital 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.

26


During the third quarter of 2013, worldwide ARPU was $1.72, an increase of 33% from the third quarter of 2012. Over this period, ARPU increased by 40% or more in each of the four geographic regions disclosed above. 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.

27


Results of Operations
The following table set forth our condensed consolidated statements of operations data:   
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(in millions)
Revenue
$
2,016

 
$
1,262

 
$
5,286

 
$
3,504

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
507

 
322

 
1,384

 
967

Research and development
369

 
244

 
1,006

 
1,102

Marketing and sales
233

 
168

 
704

 
703

General and administrative
171

 
151

 
520

 
717

Total costs and expenses
1,280

 
885

 
3,614

 
3,489

Income from operations
736

 
377

 
1,672

 
15

Interest and other expense, net
(10
)
 
(5
)
 
(48
)
 
(26
)
Income (loss) before provision for income taxes
726

 
372

 
1,624

 
(11
)
Provision for income taxes
301

 
431

 
647

 

Net income (loss)
$
425

 
$
(59
)
 
$
977

 
$
(11
)
Share-based compensation expense included in costs and expenses:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(in millions)
Share-based compensation expense included in costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
$
12

 
$
8

 
$
31

 
$
79

Research and development
164

 
114

 
432

 
719

Marketing and sales
34

 
28

 
91

 
279

General and administrative
29

 
29

 
79

 
311

Total share-based compensation expense
$
239

 
$
179

 
$
633

 
$
1,388



28


The following table set forth our condensed consolidated statements of operations data (as a percentage of revenue): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenue
100
%
 
100
 %
 
100
 %
 
100
 %
Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
25
%
 
26
 %
 
26
 %
 
28
 %
Research and development
18
%
 
19
 %
 
19
 %
 
31
 %
Marketing and sales
12
%
 
13
 %
 
13
 %
 
20
 %
General and administrative
8
%
 
12
 %
 
10
 %
 
20
 %
Total costs and expenses
63
%
 
70
 %
 
68
 %
 
100
 %
Income from operations
37
%
 
30
 %
 
32
 %
 
 %
Interest and other expense, net
%
 
 %
 
(1
)%
 
(1
)%
Income (loss) before provision for income taxes
36
%
 
29
 %
 
31
 %
 
 %
Provision for income taxes
15
%
 
34
 %
 
12
 %
 
 %
Net income (loss)
21
%
 
(5
)%
 
18
 %
 
 %
Share-based compensation expense included in costs and expenses (as a percentage of revenue): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Cost of revenue
1
%
 
1
%
 
1
%
 
2
%
Research and development
8

 
9

 
8

 
21

Marketing and sales
2

 
2

 
2

 
8

General and administrative
1

 
2

 
1

 
9

Total share-based compensation expense
12
%
 
14
%
 
12
%
 
40
%
Three and Nine Months Ended September 30, 2013 and 2012
Revenue 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
%
change
 
2013
 
2012
 
%
change
 
(in millions, except for percentages)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Advertising
$
1,798

 
$
1,086

 
66
%
 
$
4,641

 
$
2,950

 
57
%
Payments and other fees
218

 
176

 
24
%
 
645

 
554

 
16
%
Total revenue
$
2,016

 
$
1,262

 
60
%
 
$
5,286

 
$
3,504

 
51
%
Revenue in the third quarter and the first nine months of 2013 increased $754 million, or 60%, and $1,782 million, or 51%, respectively, compared to the same periods in 2012. The increases were due primarily to increases in advertising revenue.
Advertising revenue increased $712 million, or 66%, and $1,691 million, or 57%, in the third quarter and the first nine months of 2013, respectively, compared to the same periods in 2012. Advertising revenue grew due to a 16% and 32% increase in the number of ads delivered during the third quarter and the first nine months of 2013, respectively, and a 42% and 19% 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 third quarter and the first nine months of 2013, we estimate that advertising revenue from News Feed ads on mobile devices represented approximately 49% and 41%, respectively, of total advertising revenue, as compared with approximately 14% and 6% in the same periods in 2012. Revenue from News Feed ads on mobile devices increased 33% compared

29


to the second quarter of 2013 due to increases in: the average price per mobile ad; the number of mobile users; and the number of ads shown per mobile user.
Other factors that influenced our advertising revenue growth and advertising 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) 25% growth in average DAUs and 18% growth in MAUs from September 30, 2012 to September 30, 2013, which increased the number of ads we delivered; (iii) an increase in the number of ads displayed in News Feed on both mobile devices and personal computers; and (iv) 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 third quarter and the first nine months of 2013 increased $42 million, or 24%, and $91 million, or 16%, 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 September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
%
change
 
2013
 
2012
 
%
change
 
(in millions, except for percentages)
Cost of revenue
$
507

 
$
322

 
57
%
 
$
1,384

 
$
967

 
43
%
Percentage of revenue
25
%
 
26
%
 
 
 
26
%
 
28
%
 
 
Cost of revenue in the third quarter and the first nine months of 2013 increased $185 million, or 57%, and $417 million, or 43%, respectively, compared to the same periods in 2012. The increases in both periods were primarily due to operational expenses related to expanding our own data centers, including $85 million and $230 million increases in depreciation for the third quarter and the first nine months of 2013, respectively. In addition, we recognized $43 million and $108 million of lease abandonment expense in the third quarter and the first nine months of 2013, respectively, primarily due to exiting certain leased data centers resulting from the migration of operations to our own data centers. In the event that circumstances change such that we decide to re-occupy and utilize any of these abandoned data centers, we would reverse the remaining lease abandonment liability associated with those facilities. The increase in cost of revenue for the first nine months of 2013 was partially offset by a $48 million decrease in share-based compensation expense compared to the same period in 2012 mainly due to the recognition of expense in the prior period 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 September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
%
change
 
2013
 
2012
 
%
change
 
(in millions, except for percentages)
Research and development
$
369

 
$
244

 
51
%
 
$
1,006

 
$
1,102

 
(9
)%
Percentage of revenue
18
%
 
19
%
 
 
 
19
%
 
31
%
 
 
Research and development expense increased $125 million, or 51%, in the third quarter of 2013 and decreased $96 million, or 9%, in the first nine months of 2013 compared to the same periods in 2012. The increase in the third quarter of 2013 was primarily due to an increase in payroll and benefits expense resulting from a 46% growth in employee headcount from September 30, 2012 to September 30, 2013 in engineering and other technical functions. Additionally, share-based compensation expense increased $50 million in the third quarter of 2013 compared to the same period in 2012. The decrease in the first nine months of 2013 was due to a $287 million decrease in share-based compensation expense compared to the same period in 2012 resulting from the recognition of expense in the prior period related to Pre-2011 RSUs as a result of our IPO in May 2012. This decrease was mostly offset by an increase in payroll and benefits expense resulting from a 46% growth in employee headcount from September 30, 2012 to September 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.

30


Marketing and sales 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
%
change
 
2013
 
2012
 
%
change
 
(in millions, except for percentages)
Marketing and sales
$
233

 
$
168

 
39%
 
$
704

 
$
703

 
—%
Percentage of revenue
12
%
 
13
%
 
 
 
13
%
 
20
%
 
 
Marketing and sales expenses increased $65 million, or 39%, for the third quarter of 2013 and were flat for the first nine months of 2013 compared to the same periods in 2012. The increase in the third quarter of 2013 was primarily due to an increase in payroll and benefits expenses resulting from a 27% increase in employee headcount from September 30, 2012 to September 30, 2013 to support global sales, business development and customer service. Additionally, our user-, developer-, and marketer-facing marketing and share-based compensation expenses increased $16 million and $6 million, respectively, in the third quarter of 2013 compared to the same period in 2012. Marketing and sales expenses for the first nine months of 2013 were flat compared to the same period in 2012. Our user-, developer-, and marketer-facing marketing expenses and payroll and benefits expense increased due to a 27% increase in employee headcount in the first nine months of 2013 when compared to the same period in 2012. These increases were offset by a $188 million decrease in share-based compensation expense for the first nine months of 2013 compared to the same period in 2012 mainly due to the recognition of expense in the prior period related to Pre-2011 RSUs as a result of our IPO in May 2012.
General and administrative 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
%
change
 
2013
 
2012
 
%
change
 
(in millions, except for percentages)
General and administrative
$
171

 
$
151

 
13
%
 
$
520

 
$
717

 
(27
)%
Percentage of revenue
8
%
 
12
%
 
 
 
10
%
 
20
%
 
 
General and administrative expenses increased $20 million, or 13%, in the third quarter of 2013 and decreased $197 million, or 27%, in the first nine months of 2013 compared to the same periods in 2012. The increase in the third quarter of 2013 was primarily due to an increase in payroll and benefits expenses resulting from a 20% increase in employee headcount from September 30, 2012 to September 30, 2013 in recruiting, information technology and other functions, partially offset by a decrease in legal-related expenses. The decrease in the first nine months of 2013 was primarily due to a $232 million decrease in share-based compensation expense for the first nine months of 2013 compared to the same period in 2012 mainly due to the recognition of expense in the prior period related to Pre-2011 RSUs as a result of our IPO in May 2012. The decrease was partially offset by an increase in amortization of acquired patents.
Interest and other expense, net
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
%
change
 
2013
 
2012
 
%
change
 
(in millions, except for percentages)
Interest expense
$
(21
)
 
$
(11
)
 
91
%
 
$
(50
)
 
$
(35
)
 
43
 %
Other income, net
11

 
6

 
83
%
 
2

 
9

 
(78
)%
Interest and other expense, net
$
(10
)
 
$
(5
)
 
100
%
 
$
(48
)
 
$
(26
)
 
85
 %
Interest and other expense, net increased $5 million in the third quarter of 2013 and $22 million in the first nine months of 2013 compared to the same periods in 2012. Interest expense increased $10 million and $15 million in the third quarter and the first nine 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 and fully repaid in August 2013. Other income, net in the third quarter of 2013 increased $5 million compared to the same period in 2012 primarily due to a foreign exchange gain recognized in the third quarter of 2013 resulting from the periodic re-measurement of our foreign currency balances. Other income, net in the first nine months of 2013 decreased $7 million compared

31


to the same period in 2012 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.
Provision for income taxes
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
%
change
 
2013
 
2012
 
%
change
 
(in millions, except for percentages)
Provision for income taxes
$
301

 
$
431

 
(30
)%
 
$
647

 
$

 
NM
Effective tax rate
41
%
 
116
%
 
 
 
40
%
 
%
 
 
Our provision for income taxes in the third quarter of 2013 and 2012 was $301 million and $431 million, respectively, and $647 million for the first nine months of 2013. There was no provision for income taxes for the first nine months of 2012. The change in our provision for income taxes is primarily due to an increase in income before income taxes in the third quarter and the first nine months of 2013.
Our effective tax rate decreased in the third quarter 2013 compared to the same period in 2012 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. A comparison of our effective tax rate for the first nine months of 2013 to the same period in 2012 is not meaningful since our provision for income taxes and effective tax rate were both zero in the same period in 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 jurisdictions, 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 $9.33 billion as of September 30, 2013, a decrease of $298 million from December 31, 2012, primarily due to the repayment of our $1.5 billion term loan. In addition, we used $879 million for purchases of property and equipment, $706 million for tax payments related to net share settlement of equity awards, $291 million for principal payments on capital lease transactions and $237 million for acquisitions of businesses and other assets. These decreases were partially offset by $2.99 billion of cash generated from operations which included the receipt of an income tax refund of $419 million.

Beginning in 2014, we intend to fund withholding taxes due on employee equity awards by requiring employees to sell shares of our common stock to cover such taxes upon vesting of such awards (sell-to-cover), rather than our current approach of net share settlement. We expect this sell-to-cover approach will reduce our cash outflows.
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.
In August 2013, in connection with the termination of our existing credit facilities, we entered into a five-year senior unsecured revolving credit facility (2013 Revolving Credit Facility) that allows us to borrow up to $6.5 billion to fund working capital and general corporate purposes 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 paid origination fees at closing of the 2013 Revolving Credit Facility, which fees are being amortized over the term of the facility. Any amounts outstanding under this facility will be due and payable on August 15, 2018. As of September 30, 2013, no amounts had been drawn down and we were in compliance with the covenants under this credit facility. See Note 8 in the notes to the condensed consolidated financial statements included in Part I, Item 1 for additional detail.
As of September 30, 2013, $531 million of the $9.33 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.

32


Cash Provided by Operating Activities
Cash flow from operating activities during the first nine months of 2013 primarily consisted of net income, adjusted for certain non-cash items, including total depreciation and amortization of $737 million and share-based compensation expense of $633 million, and the receipt of an income tax refund of $419 million. The increase in cash flow from operating activities during the first nine 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 nine months of 2013 primarily resulted from $879 million for capital expenditures related to the purchase of servers, networking equipment, storage infrastructure, and the construction of data centers and buildings, $237 million for acquisitions of businesses and other assets, such as patents, partially offset by $1.02 billion of net sales and maturities of marketable securities. The decrease in cash used in investing activities during the first nine months of 2013 compared to the same period in 2012 was mainly due to proceeds from $1.02 billion in net sales and maturities of marketable securities in the first nine months of 2013 compared to use of $5.61 billion from net purchases of marketable securities in the same period in 2012. In addition, we used less cash to acquire businesses and other assets in the first nine months of 2013 compared to the same period in 2012.
We anticipate making capital expenditures in 2013 of approximately $1.4 billion.
Cash (Used in) Provided by Financing Activities
Cash used in financing activities was $2.19 billion for the first nine months of 2013, primarily resulted from $1.5 billion for repayment of debt and $706 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 $706 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 $7.6 billion for the first nine 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 September 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, other than the repayment of our $1.5 billion term loan.
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.

33


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.
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 gains of $6 million in the three months ended September 30, 2013 and foreign currency losses of $13 million, $1 million, and $4 million in the nine months ended September 30, 2013 and the three and nine months ended September 30, 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 $57 million and $55 million in the market value of our available-for-sale debt securities as of September 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.
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 addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

34


PART II—OTHER INFORMATION
Item 1.
Legal Proceedings
Paul D. Ceglia filed suit against us and Mark Zuckerberg on or about June 30, 2010, in the Supreme Court of the State of New York for the County of Allegheny, claiming substantial ownership of our company based on a purported contract between Mr. Ceglia and Mr. Zuckerberg allegedly entered into in April 2003. We removed the case to the U.S. District Court for the Western District of New York, where the case is now pending. In his first amended complaint, filed on April 11, 2011, Mr. Ceglia revised his claims to include an alleged partnership with Mr. Zuckerberg, he revised his claims for relief to seek a substantial share of Mr. Zuckerberg's ownership in us, and he included quotations from supposed emails that he claims to have exchanged with Mr. Zuckerberg in 2003 and 2004. On March 26, 2012, we filed a motion to dismiss Mr. Ceglia's complaint and a motion for judgment on the pleadings. On March 26, 2013, the magistrate judge overseeing the matter issued a report recommending that the court grant our motion to dismiss and that it deny as moot our motion for judgment on the pleadings. We continue to believe that Mr. Ceglia is attempting to perpetrate a fraud on the court and we intend to continue to defend the case vigorously.
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 initial public offering (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. On October 8, 2013, the court heard 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. Any such inquiries could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.
We are also party to various legal proceedings and claims that arise in the ordinary course of business. Among these pending legal matters, one case is currently scheduled for trial in the near future. Rembrandt Social Media, LP v. Facebook, Inc., et al., is scheduled to begin trial on December 10, 2013, in the U.S. District Court for the Eastern District of Virginia. In the Rembrandt case, the plaintiff alleges that we infringe certain patents held by the plaintiff. The plaintiff is seeking significant monetary damages and equitable relief.
    
We believe the claims made by the plaintiff in the Rembrandt case are without merit, and we intend to defend ourselves vigorously. Because the outcome of litigation is inherently uncertain, we believe it is reasonably possible that we may incur a loss in connection with this matter. However, we do not believe such a loss is probable and we are unable to estimate a reasonable range of loss, if any, that could result were there to be an adverse final decision, and we therefore have not accrued a liability for this matter. If an unfavorable outcome were to occur in this case, it is possible that the impact could be material to our results of operations in the period(s) in which any such outcome becomes probable and estimable.
In addition, we are also currently parties to multiple other lawsuits related to our products, including other 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 from the ordinary course of our business. Although the results of these other lawsuits, claims, government investigations, and proceedings in which we are involved cannot be predicted with certainty, we do not believe that the final outcome of these other matters will have a material adverse effect on our business, financial condition, or results of operations.

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Item 1A.
Risk Factors
Certain factors may have a material adverse effect on our business, financial condition, and results of operations. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the trading price of our Class A common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business and Industry
If we fail to retain existing users or add new users, or if our users decrease their level of engagement with Facebook, our revenue, financial results, and business may be significantly harmed.
The size of our user base and our users' level of engagement are critical to our success. Our financial performance has been and will continue to be significantly determined by our success in adding, retaining, and engaging active users. We anticipate that our active user growth rate will decline over time as the size of our active user base increases, and as we achieve highe