10-Q 1 fb-6302014x10q.htm 10-Q FB-6.30.2014-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________ 
FORM 10-Q
____________________________________________ 
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
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
 
x
Accelerated filer
 
¨
 
 
 
 
 
Non-accelerated filer
 
¨ (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
2,015,048,077 shares outstanding as of July 22, 2014
Class B Common Stock $0.000006 par value
585,003,514 shares outstanding as of July 22, 2014



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. For references to accessing Facebook on the "web" or via a "website," such terms refer to accessing Facebook on desktop or personal computers. For references to accessing Facebook on "mobile," such term refers to accessing Facebook via a mobile application or via a mobile-optimized version of our website such as m.facebook.com, whether on a mobile phone or tablet.

3


LIMITATIONS OF KEY METRICS AND OTHER DATA
The numbers for our key metrics, which include our daily active users (DAUs), mobile DAUs, monthly active users (MAUs), mobile MAUs, and average revenue per user (ARPU), as well as certain other metrics such as mobile-only 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 in 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. In 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. In the third quarter of 2013, we worked with third parties to develop models to more accurately analyze user data by age in the United States. These models suggested that usage by U.S. teens overall was stable, but that DAUs among younger U.S. teens had declined. 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 metrics 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 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. The number of such users for the period ended March 31, 2012 disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations — Trends in Our User Metrics" reflects the reclassification to more correctly attribute users by geographic region. Our estimates for revenue by user location and revenue by user device are also affected by these factors.
We regularly review our processes for calculating these metrics, and from time to time we may make adjustments to improve their accuracy. These adjustments may result in the recalculation of our historical metrics, which are immaterial unless otherwise stated. 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, mobile DAUs, MAUs, mobile MAUs, mobile-only DAUs 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

4


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.

5


PART I—FINANCIAL INFORMATION
Item 1.
Financial Statements
FACEBOOK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except for number of shares and par value)
(Unaudited)
 
June 30,
2014
 
December 31,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,384

 
$
3,323

Marketable securities
9,572

 
8,126

Accounts receivable, net of allowances for doubtful accounts of $33 and $38 as of June 30, 2014 and December 31, 2013, respectively
1,190

 
1,109

Prepaid expenses and other current assets
411

 
512

Total current assets
15,557

 
13,070

Property and equipment, net
3,334

 
2,882

Goodwill and intangible assets, net
1,672

 
1,722

Other assets
206

 
221

Total assets
$
20,769

 
$
17,895

Liabilities and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
146

 
$
87

Developer partners payable
176

 
181

Accrued expenses and other current liabilities
666

 
555

Deferred revenue and deposits
53

 
38

Current portion of capital lease obligations
173

 
239

Total current liabilities
1,214

 
1,100

Capital lease obligations, less current portion
153

 
237

Other liabilities
1,056

 
1,088

Total liabilities
2,423

 
2,425

Stockholders' equity:
 
 
 
Common stock, $0.000006 par value; 5,000 million Class A shares authorized, 2,013 million and 1,970 million shares issued and outstanding, including 5 million and 6 million outstanding shares subject to repurchase, as of June 30, 2014 and December 31, 2013, respectively; 4,141 million Class B shares authorized, 562 million and 577 million shares issued and outstanding, including 5 million and 6 million outstanding shares subject to repurchase, as of June 30, 2014 and December 31, 2013, respectively

 

Additional paid-in capital
13,759

 
12,297

Accumulated other comprehensive (loss) income
(5
)
 
14

Retained earnings
4,592

 
3,159

Total stockholders' equity
18,346

 
15,470

Total liabilities and stockholders' equity
$
20,769

 
$
17,895

See Accompanying Notes to Condensed Consolidated Financial Statements.

6



FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
(Unaudited) 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
2,910

 
$
1,813

 
$
5,412

 
$
3,271

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
473

 
465

 
936

 
878

Research and development
492

 
344

 
947

 
637

Marketing and sales
358

 
269

 
681

 
472

General and administrative
197

 
173

 
384

 
349

Total costs and expenses
1,520

 
1,251

 
2,948

 
2,336

Income from operations
1,390

 
562

 
2,464

 
935

Interest and other income/(expense), net
(4
)
 
(17
)
 
(4
)
 
(37
)
Income before provision for income taxes
1,386

 
545

 
2,460

 
898

Provision for income taxes
595

 
212

 
1,027

 
346

Net income
$
791

 
$
333

 
$
1,433

 
$
552

Less: Net income attributable to participating securities
3

 
2

 
6

 
3

Net income attributable to Class A and Class B common stockholders
$
788

 
$
331

 
$
1,427

 
$
549

Earnings per share attributable to Class A and Class B common stockholders:
 
 
 
 
 
 
 
Basic
$
0.31

 
$
0.14

 
$
0.56

 
$
0.23

Diluted
$
0.30

 
$
0.13

 
$
0.55

 
$
0.22

Weighted average shares used to compute earnings per share attributable to Class A and Class B common stockholders:
 
 
 
 
 
 
 
Basic
2,560

 
2,407

 
2,552

 
2,397

Diluted
2,615

 
2,502

 
2,609

 
2,499

Share-based compensation expense included in costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
$
16

 
$
11

 
$
28

 
$
19

Research and development
219

 
151

 
400

 
268

Marketing and sales
50

 
33

 
93

 
57

General and administrative
29

 
29

 
67

 
50

Total share-based compensation expense
$
314

 
$
224

 
$
588

 
$
394

See Accompanying Notes to Condensed Consolidated Financial Statements.


7


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited) 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
791

 
$
333

 
$
1,433

 
$
552

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
(20
)
 
(13
)
 
(21
)
 
(31
)
Change in unrealized gain/loss on available-for-sale investments, net of tax

 
(3
)
 
2

 
(3
)
Change in unrealized gain/loss on derivative, net of tax

 
2

 

 
3

Comprehensive income
$
771

 
$
319

 
$
1,414

 
$
521

See Accompanying Notes to Condensed Consolidated Financial Statements.

8


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Six Months Ended June 30,
 
2014
 
2013
Cash flows from operating activities
 
 
 
Net income
$
1,433

 
$
552

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
521

 
463

Lease abandonment
(26
)
 
65

Share-based compensation
588

 
394

Deferred income taxes
(34
)
 
19

Tax benefit from share-based award activity
875

 
148

Excess tax benefit from share-based award activity
(883
)
 
(155
)
Other
3

 
20

Changes in assets and liabilities:
 
 
 
Accounts receivable
(82
)
 
(62
)
Prepaid expenses and other current assets
10

 
428

Other assets
18

 
(44
)
Accounts payable
69

 
2

Developer partners payable
(5
)
 
3

Accrued expenses and other current liabilities
75

 
9

Deferred revenue and deposits
15

 
2

Other liabilities
49

 
197

Net cash provided by operating activities
2,626

 
2,041

Cash flows from investing activities
 
 
 
Purchases of property and equipment
(832
)
 
(595
)
Purchases of marketable securities
(4,482
)
 
(3,460
)
Sales of marketable securities
1,968

 
1,275

Maturities of marketable securities
1,074

 
2,174

Acquisitions of businesses, net of cash acquired, and purchases of intangible assets
(19
)
 
(221
)
Other investing activities, net
(3
)
 
3

Net cash used in investing activities
(2,294
)
 
(824
)
Cash flows from financing activities
 
 
 
Taxes paid related to net share settlement of equity awards
(3
)
 
(558
)
Proceeds from exercise of stock options
2

 
10

Principal payments on capital lease obligations
(150
)
 
(200
)
Excess tax benefit from share-based award activity
883

 
155

Net cash provided by (used in) financing activities
732

 
(593
)
Effect of exchange rate changes on cash and cash equivalents
(3
)
 
(7
)
Net increase in cash and cash equivalents
1,061

 
617

Cash and cash equivalents at beginning of period
3,323

 
2,384

Cash and cash equivalents at end of period
$
4,384

 
$
3,001

See Accompanying Notes to Condensed Consolidated Financial Statements.

9


FACEBOOK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Six Months Ended June 30,
 
2014
 
2013
Supplemental cash flow data
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
8

 
$
26

Income taxes
$
61

 
$
18

Cash received during the period for:
 
 
 
Income taxes
$
2

 
$
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
$
18

 
$
(5
)
Property and equipment acquired under capital leases
$

 
$
11

Fair value of shares issued related to acquisitions of businesses
$

 
$
77

See Accompanying Notes to Condensed Consolidated Financial Statements.

10


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, 2013.
The condensed consolidated balance sheet as of December 31, 2013 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, 2014.
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, 2013 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.
Recent Accounting Pronouncements
 In May 2014, the Financial Accounting Standards Board issued guidance related to revenue from contracts with customers. Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standard will replace most existing revenue recognition guidance under GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard will be effective for us in the first quarter of 2017. We have not yet selected a transition method and we are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
Note 2.
Earnings per Share
We compute earnings per share (EPS) of Class A and Class B common stock using the two-class method required for participating securities. 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 participating securities are subtracted from net income in determining net income attributable to common stockholders. Basic EPS is computed by dividing net income 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.

11


For the calculation of diluted EPS, net income 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 of our Class B common stock to Class A 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 attributable to common stockholders by the weighted-average number of fully diluted common shares outstanding.
We have excluded 18 million and 10 million restricted stock units (RSUs) from the EPS calculation for the three and six months ended June 30, 2014, respectively, and 50 million and 23 million RSUs for the three and six months ended June 30, 2013, respectively, because the impact would be 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 June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
617

 
$
174

 
$
245

 
$
88

 
$
1,116

 
$
317

 
$
400

 
$
152

Less: Net income attributable to participating securities
2

 
1

 
2

 

 
5

 
1

 
2

 
1

Net income attributable to common stockholders
$
615

 
$
173

 
$
243

 
$
88

 
$
1,111

 
$
316

 
$
398

 
$
151

Denominator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
2,002

 
568

 
1,779

 
644

 
1,992

 
571

 
1,744

 
668

Less: Shares subject to repurchase
5

 
5

 
7

 
9

 
5

 
6

 
5

 
10

Number of shares used for basic EPS computation
1,997

 
563

 
1,772

 
635

 
1,987

 
565

 
1,739

 
658

Basic EPS
$
0.31

 
$
0.31

 
$
0.14

 
$
0.14

 
$
0.56

 
$
0.56

 
$
0.23

 
$
0.23

Diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
615

 
$
173

 
$
243

 
$
88

 
$
1,111

 
$
316

 
$
398

 
$
151

Reallocation of net income attributable to participating securities
3

 

 
2

 

 
6

 

 
3

 

Reallocation of net income as a result of conversion of Class B to Class A common stock
173

 

 
88

 

 
316

 

 
151

 

Reallocation of net income to Class B common stock

 
7

 

 
10

 

 
14

 

 
17

Net income attributable to common stockholders for diluted EPS
$
791

 
$
180

 
$
333

 
$
98

 
$
1,433

 
$
330

 
$
552

 
$
168

Denominator
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares used for basic EPS computation
1,997

 
563

 
1,772

 
635

 
1,987

 
565

 
1,739

 
658

Conversion of Class B to Class A common stock
563

 

 
635

 

 
565

 

 
658

 

Weighted average effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee stock options
13

 
13

 
73

 
73

 
14

 
14

 
75

 
75

RSUs
36

 
17

 
19

 
19

 
36

 
17

 
22

 
22

Shares subject to repurchase
6

 
4

 
3

 
3

 
7

 
4

 
5

 
5

Number of shares used for diluted EPS computation
2,615

 
597

 
2,502

 
730

 
2,609

 
600

 
2,499

 
760

Diluted EPS
$
0.30

 
$
0.30

 
$
0.13

 
$
0.13

 
$
0.55

 
$
0.55

 
$
0.22

 
$
0.22


13


Note 3.
Cash, Cash Equivalents and Marketable Securities
The following table sets forth the cash, cash equivalents and marketable securities (in millions):
 
June 30, 2014
 
December 31, 2013
Cash and cash equivalents:
 
 
 
Cash
$
1,354

 
$
1,044

Cash equivalents:

 

Money market funds
2,959

 
2,279

U.S. government agency securities
71

 

Total cash and cash equivalents
4,384

 
3,323

Marketable securities:
 
 
 
U.S. government securities
6,434

 
5,687

U.S. government agency securities
3,138

 
2,439

Total marketable securities
9,572

 
8,126

Total cash, cash equivalents and marketable securities
$
13,956

 
$
11,449

The gross unrealized gains or losses on our marketable securities as of June 30, 2014 and December 31, 2013 were not significant. In addition, there were no securities in a continuous loss position for 12 months or longer as of June 30, 2014 and December 31, 2013.
The following table classifies our marketable securities by contractual maturities (in millions):  
 
June 30, 2014
Due in one year
$
6,232

Due in one to two years
3,340

Total
$
9,572


14


Note 4.
Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis are summarized below (in millions): 
 
 
 
Fair Value Measurement at
Reporting Date Using
Description
June 30, 2014
 
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
$
2,959

 
$
2,959

 
$

 
$

U.S. government agency securities
71

 
71

 

 

Marketable securities:
 
 
 
 
 
 
 
U.S. government securities
6,434

 
6,434

 

 

U.S. government agency securities
3,138

 
3,138

 

 

Total cash equivalents and marketable securities
$
12,602

 
$
12,602

 
$

 
$

 
 
 
Fair Value Measurement at
Reporting Date Using
Description
December 31, 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
$
2,279

 
$
2,279

 
$

 
$

Marketable securities:
 
 
 
 
 
 
 
U.S. government securities
5,687

 
5,687

 

 

U.S. government agency securities
2,439

 
2,439

 

 

Total cash equivalents and marketable securities
$
10,405

 
$
10,405

 
$

 
$

Note 5.
Property and Equipment
Property and equipment consisted of the following (in millions): 
 
June 30,
2014
 
December 31,
2013
Network equipment
$
2,553

 
$
2,351

Land
45

 
45

Buildings
1,178

 
1,071

Leasehold improvements
259

 
203

Computer software, office equipment and other
121

 
95

Construction in progress
638

 
377

Total
4,794

 
4,142

Less: Accumulated depreciation
(1,460
)
 
(1,260
)
Property and equipment, net
$
3,334

 
$
2,882

Construction in progress includes costs primarily related to the construction of data centers, expansion of our corporate headquarters in Menlo Park, California and network equipment infrastructure to support our data centers around the world. We did not capitalize any interest during the three and six months ended June 30, 2014 and interest capitalized during the three and six months ended June 30, 2013 was not material.

15


Note 6.
Goodwill and Intangible Assets
During the six months ended June 30, 2014, we completed multiple business acquisitions which were not material to our condensed consolidated financial statements individually or in the aggregate.
The changes in the carrying amount of goodwill for the six months ended June 30, 2014 are as follows (in millions): 
Balance as of December 31, 2013
$
839

Goodwill acquired
16

Effect of currency translation adjustment
2

Balance as of June 30, 2014
$
857

Intangible assets consisted of the following (in millions):
 
 
 
June 30, 2014
 
December 31, 2013
 
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
2 - 18
 
$
773

 
$
(191
)
 
$
582

 
$
773

 
$
(142
)
 
$
631

Acquired technology
2 - 10
 
241

 
(86
)
 
155

 
227

 
(65
)
 
162

Tradename and other
2 - 10
 
138

 
(60
)
 
78

 
138

 
(48
)
 
90

Total
 
 
$
1,152

 
$
(337
)
 
$
815

 
$
1,138

 
$
(255
)
 
$
883

Amortization expense of intangible assets was $41 million and $82 million for the three and six months ended June 30, 2014, respectively, and $36 million and $69 million for the three and six months ended June 30, 2013, respectively.
As of June 30, 2014, estimated amortization expense for the unamortized acquired intangible assets for the next five years and thereafter is as follows (in millions):
The remainder of 2014
$
79

2015
151

2016
138

2017
117

2018
82

2019
64

Thereafter
184

 
$
815

Note 7.
Long-term Debt
In August 2013, 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 June 30, 2014, no amounts had been drawn down and we were in compliance with the covenants under this facility.
Note 8.
Commitments and Contingencies
Leases
We entered into various capital lease arrangements to obtain property and equipment for our operations. Additionally, on occasion we have purchased property and equipment for which we have 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

16


interest rates ranging from 1% to 13%. The leases are secured by the underlying leased buildings, leasehold improvements, and equipment. We have 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 2014 and 2029. 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 or escalating rent payment provisions, and we recognize rent expense under such arrangements on a straight-line basis.
Operating lease expense was $33 million and $63 million for the three and six months ended June 30, 2014, respectively, and $32 million and $73 million for the three and six months ended June 30, 2013, respectively.
Other Agreements
In February 2014, we entered into an agreement to acquire WhatsApp Inc. (WhatsApp), a privately-held cross-platform mobile messaging company, for 183,865,778 shares of our Class A common stock and approximately $4 billion in cash, subject to certain adjustments such that the cash paid will comprise at least 25% of the aggregate transaction consideration. After closing, we also expect to grant approximately 46 million RSUs to WhatsApp employees. The value of the equity component of the final purchase price and RSUs granted will be determined for accounting purposes based on the fair value of our common stock on the closing date. This acquisition is subject to customary closing conditions, including certain regulatory approvals, and is expected to close in the second half of 2014. We have agreed to pay a termination fee to WhatsApp of $1 billion in cash and issue a number of shares of our Class A common stock equal to $1 billion, based on the average closing price of the ten trading days preceding such termination, if the closing of this acquisition has not occurred by August 19, 2014. This date may be extended by us to August 19, 2015, if as of August 19, 2014, certain closing conditions applicable to Facebook (other than the receipt of certain regulatory approvals) have been satisfied. We currently expect these conditions will be satisfied and that we will extend the date to August 19, 2015.
In April 2014, we entered into a non-cancelable contractual commitment to spend a minimum of $140 million on network services over a period of 10 years.
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 initial public offering (IPO) and seeking unspecified damages. We believe these lawsuits are without merit, and we intend to continue to vigorously defend them. 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 U.S. District Court for the Southern District of New York. In a series of rulings in 2013 and 2014, the court denied our motion to dismiss the consolidated securities class action and granted our motions to dismiss the derivative actions against our directors and certain of our officers. The plaintiffs in four of these derivative actions have filed notices of appeal. In addition, the events surrounding our IPO became the subject of various state and federal government inquiries. In May 2014, the Securities and Exchange Commission (SEC) notified us that it had terminated its inquiry and that no enforcement action had been recommended by the SEC.
We are also party to various legal proceedings and claims that arise in the ordinary course of business. Among these legal matters, Rembrandt Social Media, LP v. Facebook, Inc., et al., was pending in the U.S. District Court for the Eastern District of Virginia. In Rembrandt, the plaintiff alleged that we infringe certain patents held by the plaintiff. The plaintiff was seeking significant monetary damages and equitable relief. A jury trial in this matter took place the week of June 9, 2014. The jury rendered a verdict in our favor, finding no infringement and that all asserted patents are invalid.

With respect to our outstanding legal matters, we believe that the amount or estimable range of reasonably possible loss will not, either individually or in the aggregate, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of litigation is inherently uncertain. Therefore, if one or more of these legal matters were resolved against us for amounts in excess of management's expectations, our results of operations and financial condition, including in a particular reporting period, could be materially adversely affected.

Note 9.
Stockholders' Equity
Share-based Compensation Plans
We maintain two share-based employee compensation plans: the 2012 Equity Incentive Plan (2012 Plan) and the 2005 Stock Plan (collectively, Stock Plans). Our 2012 Plan serves as the successor to our 2005 Stock Plan and provides for the issuance

17


of incentive and nonstatutory stock options, restricted stock awards, stock appreciation rights, RSUs, performance shares and stock bonuses to qualified employees, directors and consultants. Outstanding awards under the 2005 Stock Plan continue to be subject to the terms and conditions of the 2005 Stock Plan. 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 year 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 2014. 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 were withheld in connection with the net settlement of RSUs were also added to the reserves of the 2012 Plan. In January 2014, we began requiring that employees sell a portion of the shares that they receive upon the vesting of RSUs in order to cover any required withholding taxes, rather than our previous approach of net share settlement.
In February 2014, we terminated our 2005 Officers' Plan as the only outstanding option issued under this plan had been exercised in full.
The following table summarizes the stock option activity under the Stock Plans during the six months ended June 30, 2014: 
 
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, 2013
22,102

 
$
3.56

 
 
 
 
Stock options exercised
(3,420
)
 
0.39

 
 
 
 
Balance as of June 30, 2014
18,682

 
$
4.14

 
4.47
 
$
1,180

Stock options vested and expected to vest as of June 30, 2014
18,664

 
$
4.14

 
4.46
 
$
1,179

Stock options exercisable as of June 30, 2014
14,804

 
$
2.29

 
4.04
 
$
962

(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 $67.29 on June 30, 2014.
The aggregate intrinsic value of options exercised was $43 million and $204 million for the three and six months ended June 30, 2014, respectively, and $269 million and $580 million for the three and six months ended June 30, 2013, respectively.
The following table summarizes the activities for our unvested RSUs for the six months ended June 30, 2014:
 
Unvested RSUs
 
Number of Shares
 
Weighted Average Grant Date Fair Value
 
(in thousands)
 
 
Unvested at December 31, 2013
103,971

 
$
27.30

Granted
21,060

 
67.58

Vested
(24,482
)
 
24.36

Forfeited
(4,263
)
 
33.37

Unvested at June 30, 2014
96,286

 
$
36.59


The fair value as of the respective vesting dates of RSUs that vested during the three and six months ended June 30, 2014 was $589 million and $1.54 billion, respectively, and $343 million and $828 million, respectively, during the three and six months ended June 30, 2013.
As of June 30, 2014, there was $3.34 billion of unrecognized share-based compensation expense, of which $3.12 billion is related to RSUs and $222 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.

18


Note 10.
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.
Our effective tax rate has exceeded the U.S. statutory rate primarily because of the effect of non-deductible share-based compensation and the impact of acquiring intellectual property and integrating it into our business. 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.
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 potential examination by the IRS and all tax years starting in 2008 remain subject to potential 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.
Although the timing of the resolution, settlement, and closure of any audit is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years remaining that are subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.
Note 11.
Geographical Information
Revenue by geography is based on the billing address of the marketer or developer. The following tables set forth revenue and property and equipment, net by geographic area (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
United States
$
1,260

 
$
818

 
$
2,389

 
$
1,498

Rest of the world (1)
1,650

 
995

 
3,023

 
1,773

Total revenue
$
2,910

 
$
1,813

 
$
5,412

 
$
3,271

 
(1)
No individual country exceeded 10% of our total revenue for any period presented.
 
June 30,
2014
 
December 31,
2013
Property and equipment, net:
 
 
 
United States
$
2,702

 
$
2,368

Sweden
466

 
415

Rest of the world
166

 
99

Total property and equipment, net
$
3,334

 
$
2,882

 
Note 12.
Subsequent Events
In July 2014, we completed our acquisition of Oculus VR, Inc., a privately-held company developing virtual reality technology, for 23,071,377 shares of our Class B common stock ($1.6 billion based on the fair value of our common stock on the effective date of the acquisition) and approximately $400 million in cash. Further, up to an additional 3,460,706 shares of our Class B common stock and $60 million in cash will be payable upon the completion of certain milestones. The earn-out portion that would be payable to employee equityholders is also subject to continuous employment through the applicable payment dates.

19


Given the timing of the completion of the acquisition, we are currently in the process of valuing the assets acquired and liabilities assumed in the acquisition. As a result, we are unable to provide the amount recognized as of the acquisition date for the major classes of assets acquired and liabilities assumed and certain disclosures pertaining to the contingent considerations. We will provide these disclosures in our Quarterly Report on Form 10-Q for the third quarter of 2014.


20


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013, 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 people who use Facebook, marketers, and developers:
People. 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.
Marketers. We enable marketers to engage with more than 1.3 billion monthly active users (MAUs) 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.
Developers. We enable developers to use Facebook's developer services to build, grow and monetize their mobile and web applications more rapidly and successfully.
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 developers. During the three and six months ended June 30, 2014, we recorded revenue of $2.91 billion and $5.41 billion, respectively, income from operations of $1.39 billion and $2.46 billion, respectively, and net income of $791 million and $1.43 billion, respectively.


21


Trends in Our User Metrics
The numbers for our key metrics, our daily active users (DAUs), mobile DAUs, MAUs, mobile MAUs and average revenue per user (ARPU), and certain other metrics such as mobile-only 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.
Trends in the number of users affect our revenue and financial results by influencing the number of ads we are able to show, the value of our ads to marketers, the volume of Payments transactions, as well as our expenses and capital expenditures.
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, used our Messenger app, or took an action to share content or activity with his or her Facebook friends or connections via a third-party website or application that is integrated with Facebook, on a given day. We view DAUs, and DAUs as a percentage of MAUs, as measures of user engagement.
Note: For purposes of reporting DAUs, MAUs, and ARPU by geographic region, Europe includes all users in Russia and Turkey, Asia includes all users in Australia and New Zealand, and Rest of World includes all users in Africa, Latin America, and the Middle East.

22



Worldwide DAUs increased 19% to 829 million on average during June 2014 from 699 million during June 2013. We experienced growth in DAUs across major markets including India, Brazil, and the United States. Overall growth in DAUs was driven by increased mobile usage of Facebook. The number of DAUs accessing Facebook on personal computers decreased in June 2014 compared to the same period in 2013. We believe that use of Facebook through personal computers will continue to decline worldwide, including in key markets such as the United States and other developed markets in Europe and Asia.
Mobile DAUs. We define a mobile DAU as a user who accessed Facebook via a mobile application or via mobile versions of our website such as m.facebook.com, whether on a mobile phone or tablet, or used our Messenger app on a given day.
Worldwide mobile DAUs increased 39% to 654 million on average during June 2014 from 469 million during June 2013. In all regions, an increasing number of our DAUs are accessing Facebook through mobile devices, with users in Brazil, India, and the United States representing key sources of mobile DAU growth on average during June 2014 as compared to the same period during 2013. On average during the month ended June 30, 2014, there were 488 million DAUs who accessed Facebook solely through mobile applications or our mobile website , increasing 56% from 313 million mobile-only DAUs during the same period in 2013. The remaining mobile DAUs accessed Facebook from both personal computers and mobile devices . We anticipate that growth in mobile users will continue to be the driver of our user growth for the foreseeable future.

23


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, used our Messenger app, or took an action to share content or activity with his or her Facebook friends or connections via a third-party website or application 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 June 30, 2014, we had 1.32 billion MAUs, an increase of 14% from June 30, 2013. Users in India and Brazil represented key sources of growth in the second quarter of 2014 relative to the same period in 2013. Overall growth in MAUs was driven by increased mobile usage of Facebook. The number of MAUs accessing Facebook on personal computers decreased in June 2014 compared to the same period in 2013. We believe that use of Facebook through personal computers will continue to decline worldwide, including in key markets such as the United States and other developed markets in Europe and Asia.

24


Mobile MAUs. We define a mobile MAU as a user who accessed Facebook via a mobile application or via mobile versions of our website such as m.facebook.com, whether on a mobile phone or tablet, or used our Messenger app during the period of measurement.
Worldwide mobile MAUs increased 31% to 1.07 billion as of June 30, 2014 from 819 million as of June 30, 2013. 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 MAU growth over the second quarter of 2014 as compared to the same period in 2013. There were 399 million mobile MAUs who accessed Facebook solely through mobile applications or our mobile website during the month ended June 30, 2014, increasing 82% from 219 million during the same period in 2013. The remaining 671 million mobile MAUs accessed Facebook from both personal computers and mobile devices during June 2014. We anticipate that growth in mobile users will continue to be the driver of our user growth for the foreseeable future.

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. The geography of our users affects our revenue and financial results because we currently monetize users in different geographies at different average rates. 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. For example, ARPU for an average user in the second quarter of 2014 in United States & Canada was approximately six times higher than for an average user in Asia.
 
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 second quarter of 2014, worldwide ARPU was $2.24, an increase of 40% from the second quarter of 2013. Over this period, ARPU increased by approximately 52% in Europe, 49% in United States & Canada, 44% in Asia, and 37% in Rest of World. 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 be primarily concentrated 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 developers with applications on the Facebook website.
Advertising. Our advertising revenue is generated by displaying ad products on Facebook properties, including our mobile applications and third-party affiliated websites or mobile applications. 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. We calculate price per ad as total ad revenue divided by the number of ads delivered, representing the effective price paid per impression by a marketer regardless of their desired objective such as impression, click, or action.
Payments and other fees. We enable Payments from our users to purchase virtual and digital goods from our developers with applications on the Facebook website. Our users can transact and make payments on the Facebook website by using debit and credit cards, PayPal, mobile phone payments, gift cards or other methods. We receive a fee from developers when users make purchases in these applications using our Payments infrastructure. We recognize revenue net of amounts remitted to our developers. We have mandated the use of our Payments infrastructure for game applications on Facebook, and fees related to Payments are generated almost exclusively from games. Our other fees revenue, which has not been significant in recent periods, consists primarily of user paid services and our ad serving and measurement products.
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-, marketer-, and developer-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, and legal and accounting services. General and administrative expenses also include legal settlements and amortization of patents we acquired.


27


Results of Operations
The following tables set forth our condensed consolidated statements of income data:   
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(in millions)
Revenue
$
2,910

 
$
1,813

 
$
5,412

 
$
3,271

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
473

 
465

 
936

 
878

Research and development
492

 
344

 
947

 
637

Marketing and sales
358

 
269

 
681

 
472

General and administrative
197

 
173

 
384

 
349

Total costs and expenses
1,520

 
1,251

 
2,948

 
2,336

Income from operations
1,390

 
562

 
2,464

 
935

Interest and other income/(expense), net
(4
)
 
(17
)
 
(4
)
 
(37
)
Income before provision for income taxes
1,386

 
545

 
2,460

 
898

Provision for income taxes
595

 
212

 
1,027

 
346

Net income
$
791

 
$
333

 
$
1,433

 
$
552

Share-based compensation expense included in costs and expenses:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(in millions)
Cost of revenue
$
16

 
$
11

 
$
28

 
$
19

Research and development
219

 
151

 
400

 
268

Marketing and sales
50

 
33

 
93

 
57

General and administrative
29

 
29

 
67

 
50

Total share-based compensation expense
$
314

 
$
224

 
$
588

 
$
394



28


The following table set forth our condensed consolidated statements of income data (as a percentage of revenue): 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenue
100
%
 
100
 %
 
100
%
 
100
 %
Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
16

 
26

 
17

 
27

Research and development
17

 
19

 
17

 
19

Marketing and sales
12

 
15

 
13

 
14

General and administrative
7

 
10

 
7

 
11

Total costs and expenses
52

 
69

 
54

 
71

Income from operations
48

 
31

 
46

 
29

Interest and other income/(expense), net

 
(1
)
 

 
(1
)
Income before provision for income taxes
48

 
30

 
45

 
27

Provision for income taxes
20

 
12

 
19

 
11

Net income
27
%
 
18
 %
 
26
%
 
17
 %
Share-based compensation expense included in costs and expenses (as a percentage of revenue): 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Cost of revenue
1
%
 
1
%
 
1
%
 
1
%
Research and development
8

 
8

 
7

 
8

Marketing and sales
2

 
2

 
2

 
2

General and administrative
1

 
2

 
1

 
2

Total share-based compensation expense
11
%
 
12
%
 
11
%
 
12
%
Three and Six Months Ended June 30, 2014 and 2013
Revenue 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2014
 
2013
 
% change
 
2014
 
2013
 
% change
 
(in millions, except for percentages)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Advertising
$
2,676

 
$
1,599

 
67
%
 
$
4,941

 
$
2,844

 
74
%
Payments and other fees
234

 
214

 
9
%
 
471

 
427

 
10
%
Total revenue
$
2,910

 
$
1,813

 
61
%
 
$
5,412

 
$
3,271

 
65
%
Revenue in the second quarter and the first six months of 2014 increased $1.1 billion, or 61%, and $2.14 billion, or 65%, respectively, compared to the same periods in 2013. The increases were primarily due to increases in advertising revenue.
Advertising revenue increased $1.08 billion, or 67%, and $2.1 billion, or 74%, in the second quarter and the first six months of 2014, respectively, compared to the same periods in 2013. The primary factor driving advertising revenue growth in this period was an increase in revenue from ads in News Feed on both mobile devices and personal computers. For the second quarter and the first six months of 2014, we estimate that advertising revenue from News Feed ads on mobile devices represented approximately 62% and 60%, respectively, of total advertising revenue, as compared with approximately 41% and 36% in the same periods in 2013.
Factors that influenced our advertising revenue growth in these periods included: (i) an increase in the number of News Feed ads displayed, which are more prominent, have significantly higher levels of engagement and a higher price per ad relative to our other ad placements; (ii) other product changes to increase the value and performance of our ads; (iii) an increase in the number

29


of marketers actively advertising on Facebook, which we believe increased demand for our ads; and (iv) 19% growth in average DAUs and 14% growth in MAUs from June 30, 2013 to June 30, 2014.
During the second quarter and the first six months of 2014, as compared to the same periods in 2013, the average price per ad increased by 123% and 120%, respectively, and the number of ads delivered decreased by 25% and 21%, respectively. The increase in average price per ad was driven by a mix shift towards a greater percentage of our ads being shown in News Feed. The reduction in ads delivered was driven by factors including a shift in usage towards mobile devices where users are shown fewer ads as compared to personal computers.
Payments and other fees revenue in the second quarter and the first six months of 2014 increased $20 million, or 9%, and $44 million, or 10%, respectively, compared to the same periods in 2013. Payments and other fees revenue is currently based predominantly on Payments revenue from games played on personal computers. We expect Facebook usage on personal computers to continue to decline in the future, negatively affecting our Payments revenue.
Cost of revenue
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2014
 
2013
 
% change
 
2014
 
2013
 
% change
 
(in millions, except for percentages)
Cost of revenue
$
473

 
$
465

 
2
%
 
$
936

 
$
878

 
7
%
Percentage of revenue
16
%
 
26
%
 
 
 
17
%
 
27
%
 
 
Cost of revenue in the second quarter and the first six months of 2014 increased $8 million, or 2%, and $58 million, or 7%, respectively, compared to the same periods in 2013. The increases in both periods were primarily due to operational expenses related to our data centers and technical infrastructure. These increases were partially offset by items related to data center lease abandonment: we reversed $11 million and $29 million of lease abandonment expense in the second quarter and the first six months of 2014, respectively, due to our decision to re-occupy and utilize a previously exited data center, compared to a recognition of $57 million and $65 million of lease abandonment expense in the same periods of 2013, respectively.
Research and development 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2014
 
2013
 
% change
 
2014
 
2013
 
% change
 
(in millions, except for percentages)
Research and development
$
492

 
$
344

 
43
%
 
$
947

 
$
637

 
49
%
Percentage of revenue
17
%
 
19
%
 
 
 
17
%
 
19
%
 
 
Research and development expenses in the second quarter and the first six months of 2014 increased $148 million, or 43%, and $310 million, or 49%, respectively, compared to the same periods in 2013. The increases in both periods were primarily due to increases of $68 million and $132 million in share-based compensation expense in the second quarter and the first six months of 2014, respectively. Other payroll and benefits expense also increased due to a 39% growth in employee headcount from June 30, 2013 to June 30, 2014 in engineering and other technical functions. This investment supported our efforts to improve existing products and build new products for users, marketers, and developers.
Marketing and sales 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2014
 
2013
 
% change
 
2014
 
2013
 
% change
 
(in millions, except for percentages)
Marketing and sales
$
358

 
$
269

 
33%
 
$
681

 
$
472

 
44%
Percentage of revenue
12
%
 
15
%
 
 
 
13
%
 
14
%
 
 
Marketing and sales expenses in the second quarter and the first six months of 2014 increased $89 million, or 33%, and $209 million, or 44%, respectively, compared to the same periods in 2013. The increases in both periods were primarily due to increases in payroll and benefits expenses as a result of a 43% increase in employee headcount from June 30, 2013 to June 30, 2014 to support global sales, business development and customer service. Share-based compensation expenses also increased $17 million and $36 million in the second quarter and the first six months of 2014, respectively, compared to same periods in 2013.

30


Additionally, our user-, marketer-, and developer-facing marketing expenses increased $6 million and $33 million in the second quarter and the first six months of 2014, respectively, compared to the same periods in 2013.
General and administrative 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2014
 
2013
 
% change
 
2014
 
2013
 
% change
 
(in millions, except for percentages)
General and administrative
$
197

 
$
173

 
14
%
 
$
384

 
$
349

 
10
%
Percentage of revenue
7
%
 
10
%
 
 
 
7
%
 
11
%
 
 
General and administrative expenses in the second quarter and the first six months of 2014 increased $24 million, or 14%, and $35 million, or 10%, respectively, compared to the same periods in 2013. The increases in both periods were primarily due to increases in payroll and benefits expenses as a result of a 27% increase in employee headcount from June 30, 2013 to June 30, 2014. Additionally, in the first six months of 2014, share-based compensation expenses also increased $17 million as compared to the same period in 2013. These increases were partially offset by a decrease in legal settlement costs.
Interest and other income/(expense), net
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2014
 
2013
 
% change
 
2014
 
2013
 
% change
 
(in millions, except for percentages)
Interest income/(expense), net
$

 
$
(9
)
 
(100
)%
 
$

 
$
(19
)
 
(100
)%
Other income/(expense), net
(4
)
 
(8
)
 
(50
)%
 
(4
)
 
(18
)
 
(78
)%
Interest and other income/(expense), net
$
(4
)
 
$
(17
)
 
(76
)%
 
$
(4
)
 
$
(37
)
 
(89
)%
Interest and other income/(expense), net in the second quarter and the first six months of 2014 decreased $13 million, or 76%, and $33 million, or 89%, respectively, as compared to the same periods in 2013. Interest income/(expense), net was not material in both periods presented in 2014, compared to $9 million and $19 million expenses in the second quarter and the first six months of 2013, respectively, due to the repayment of our long-term debt in August 2013 and lower capital lease payments, partially offset by increases in interest income. Other income/(expense), net decreased for both periods in 2014 compared to the same periods in 2013 primarily due to lower foreign exchange losses resulting from the periodic re-measurement of our foreign currency balances.
Provision for income taxes
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2014
 
2013
 
% change
 
2014
 
2013
 
% change
 
(in millions, except for percentages)
Provision for income taxes
$
595

 
$
212

 
181
%
 
$
1,027

 
$
346

 
197
%
Effective tax rate
43
%
 
39
%
 
 
 
42
%
 
39
%
 
 
Our provision for income taxes in the second quarter and the first six months of 2014 increased $383 million and $681 million, respectively, compared to the same periods in 2013 primarily due to increases in income before provision for income taxes in both periods.
Our effective tax rate increased in the second quarter of 2014 compared to the same period in 2013 primarily due to a change in our geographic mix of pre-tax income. Our effective tax rate increased for the first six months of 2014 compared to the same period in 2013 due to a non-recurring tax benefit related to the reinstatement of the federal credit for research and development activities applicable to the year ended December 31, 2012 that was recorded in the first quarter of 2013.
Our effective tax rate has exceeded the U.S. statutory rate primarily because of the effect of non-deductible share-based compensation and the impact of acquiring intellectual property and integrating it into our business. 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. Our future effective tax rate will also be affected by the timing, size and integration of acquisitions we may make from time to time.

31


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, investments in money market funds, and investments in U.S. government and U.S. government agency securities. Cash and cash equivalents and marketable securities were $13.96 billion as of June 30, 2014, an increase of $2.51 billion from December 31, 2013, primarily due to $2.63 billion of cash generated from operations and $883 million in excess tax benefits from share-based award activity, offset by $832 million for purchases of property and equipment and $150 million for principal payments on capital lease transactions.
In February 2014, we entered into an agreement to acquire WhatsApp Inc. (WhatsApp), a privately-held cross-platform mobile messaging company, for 183,865,778 shares of our Class A common stock and approximately $4 billion in cash, subject to certain adjustments such that the cash paid will comprise at least 25% of the aggregate transaction consideration. After closing, we also expect to grant approximately 46 million RSUs to WhatsApp employees. This acquisition is subject to customary closing conditions, including certain regulatory approvals, and is expected to close in the second half of 2014. We have agreed to pay a termination fee to WhatsApp of $1 billion in cash and issue a number of shares of our Class A common stock equal to $1 billion, based on the average closing price of the ten trading days preceding such termination, if the closing of this acquisition has not occurred by August 19, 2014. This date may be extended by us to August 19, 2015, if as of August 19, 2014, certain closing conditions applicable to Facebook (other than the receipt of certain regulatory approvals) have been satisfied. We currently expect these conditions will be satisfied and that we will extend the date to August 19, 2015.

In January 2014, we began requiring that employees sell a portion of the shares that they receive upon the vesting of RSUs in order to cover any required withholding taxes ("sell-to-cover"), rather than our previous approach of net share settlement. This sell-to-cover approach reduces our cash outflows compared to the net share settlement approach.
In August 2013, 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 June 30, 2014, no amounts had been drawn down and we were in compliance with the covenants under this credit facility.
As of June 30, 2014, $983 million of the $13.96 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.
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.
Cash Provided by Operating Activities
Cash flow from operating activities during the first six months of 2014 primarily consisted of net income, adjusted for certain non-cash items, including share-based compensation expense of $588 million and total depreciation and amortization of $521 million. The increase in cash flow from operating activities during the first six months of 2014 compared to the same period in 2013 was mainly due to an increase in net income, as adjusted for certain non-cash items described above, partially offset by a $417 million decrease in income tax refunds.
Cash Used in Investing Activities
Cash used in investing activities during the first six months of 2014 primarily resulted from $1.44 billion of net purchases of marketable securities and $832 million for capital expenditures related to the purchase of servers, network infrastructure, and the construction of data centers and office buildings. The increase in cash used in investing activities during the first six months of 2014 compared to the same period in 2013 was mainly due to increased net purchases of marketable securities.
We anticipate making capital expenditures in 2014 of approximately $2.0 billion to $2.5 billion. In July 2014, upon closing of our acquisition of Oculus, we used approximately $400 million of our cash and cash equivalent balance for the cash portion of the purchase consideration. We also anticipate spending approximately $4 billion in cash as part of the purchase price for the acquisition of WhatsApp. The cash purchase price related to the WhatsApp acquisition is subject to certain adjustments such that the cash paid will comprise at least 25% of the aggregate transaction consideration. This acquisition is still subject to customary closing conditions and is expected to close in the second half of 2014.

32


We have agreed to pay WhatsApp a $1 billion termination fee in cash if the closing of this acquisition has not occurred by August 19, 2014. This date may be extended by us to August 19, 2015, if as of August 19, 2014, certain closing conditions applicable to Facebook (other than the receipt of certain regulatory approvals) have been satisfied. We currently expect these conditions will be satisfied and that we will extend the date to August 19, 2015.
Cash Provided by (Used in) Financing Activities
Cash provided by financing activities was $732 million for the first six months of 2014, which primarily resulted from $883 million of excess tax benefit from stock award activities, offset by $150 million of payments related to our capital lease transactions.
Cash used in financing activities was $593 million for the first six months of 2013, which primarily resulted from $558 million of tax payments related to the net share settlement of equity awards.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of June 30, 2014.
Contractual Obligations
In April 2014, we entered into a non-cancelable contractual commitment to spend a minimum of $140 million on network services over a period of 10 years.
There were no other 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, 2013, except as noted above and in “Cash Used in Investing Activities” above.
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 8 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.
Recent Accounting Pronouncements
 In May 2014, the Financial Accounting Standards Board issued guidance related to revenue from contracts with customers. Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standard will replace most existing revenue recognition guidance under U.S. generally accepted accounting principles (GAAP) when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard will be effective for us in the first quarter of 2017. We have not yet selected a transition method and we are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that the assumptions and estimates associated with revenue recognition for Payments and other fees, income taxes and share-based compensation have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
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, 2013.

33


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 as a result of transaction gains or losses related to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. At this time we have not entered into, but in the future we may enter into, derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the effect hedging activities would have on our results of operations. We recognized foreign currency losses of $4 million and $3 million in the three and six months ended June 30, 2014, respectively, and $8 million and $19 million in the three and six months ended June 30, 2013, 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.
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 $75 million and $73 million in the market value of our available-for-sale debt securities as of June 30, 2014 and December 31, 2013, 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 chief executive officer (CEO) and chief financial officer (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 June 30, 2014, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (SEC), and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
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 and internal control over financial reporting, 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 and internal control over financial reporting 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. On March 25, 2014, the district judge adopted the magistrate judge’s report and recommendation and granted our motion to dismiss and denied our motion for judgment on the pleadings as moot. On April 24, 2014, Mr. Ceglia filed a notice of appeal. We continue to believe that Mr. Ceglia is perpetrating 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. 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 U.S. District Court for the Southern District of New York. In a series of rulings in 2013 and 2014, the court denied our motion to dismiss the consolidated securities class action and granted our motions to dismiss the derivative actions against our directors and certain of our officers. The plaintiffs in four of these derivative actions have filed notices of appeal. In addition, the events surrounding our IPO became the subject of various state and federal government inquiries. In May 2014, the Securities and Exchange Commission (SEC) notified us that it had terminated its inquiry and that no enforcement action had been recommended by the SEC.
We are also party to various legal proceedings and claims that arise in the ordinary course of business. Among these legal matters, Rembrandt Social Media, LP v. Facebook, Inc., et al., was pending in the U.S. District Court for the Eastern District of Virginia. In Rembrandt, the plaintiff alleged that we infringe certain patents held by the plaintiff. The plaintiff was seeking significant monetary damages and equitable relief. A jury trial in this matter took place the week of June 9, 2014. The jury rendered a verdict in our favor, finding no infringement and that all asserted patents are invalid.
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.

35


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 our products, 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 continue to decline over time as the size of our active user base increases, and as we achieve higher market penetration rates. If people do not perceive our products to be useful, reliable, and trustworthy, we may not be able to attract or retain users or otherwise maintain or increase the frequency and duration of their engagement. A number of other social networking companies that achieved early popularity have since seen their active user bases or levels of engagement decline, in some cases precipitously. There is no guarantee that we will not experience a similar erosion of our active user base or engagement levels. Our user engagement patterns have changed over time and can be difficult to measure, particularly as users engage increasingly via mobile devices and as we introduce new and different services. Any number of factors could potentially negatively affect user retention, growth, and engagement, including if:
users increasingly engage with other products or activities;
we fail to introduce new products that users find engaging or if we introduce new products or services that are not favorably received;
users feel that their Facebook experience is diminished as a result of the decisions we make with respect to the frequency, prominence, and size of ads that we display, or the quality of the ads displayed;
users have difficulty installing, updating, or otherwise accessing our products on mobile devices as a result of actions by us or third parties that we rely on to distribute our products and deliver our services;
user behavior on any of our products changes as a result of increasing use of mobile devices;
we are unable to continue to develop products for mobile devices that users find engaging, that work with a variety of mobile operating systems and networks, and that achieve a high level of market acceptance;
there are changes in user sentiment about the quality or usefulness of our products or concerns related to privacy and sharing, safety, security, or other factors;
we are unable to manage and prioritize information to ensure users are presented with content that is interesting, useful, and relevant to them;
users adopt new technologies where our products may be displaced in favor of other products or services, or may not be featured or otherwise available;
there are adverse changes in our products that are mandated by legislation, regulatory authorities, or litigation, including settlements or consent decrees;
technical or other problems prevent us from delivering our products in a rapid and reliable manner or otherwise affect the user experience, such as any failure to prevent spam or similar content;
we adopt policies or procedures related to areas such as sharing or user data that are perceived negatively by our users or the general public;
if we elect to focus our user growth and engagement efforts more on longer-term initiatives, or if initiatives designed to attract and retain users and engagement are unsuccessful or discontinued, whether as a result of actions by us, third parties, or otherwise;

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we fail to provide adequate customer service to users, marketers, or developers;
we, developers whose products are integrated with Facebook, or other companies in our industry are the subject of adverse media reports or other negative publicity; or
our current or future products, such as our development tools and application programming interfaces that enable developers to build mobile and web applications, reduce user activity on Facebook by making it easier for our users to interact and share on third-party mobile and web applications.
If we are unable to maintain or increase our user base and user engagement, our revenue and financial results may be adversely affected. Any decrease in user retention, growth, or engagement could render our products less attractive to users, marketers and developers, which may have a material and adverse impact on our revenue, business, financial condition, and results of operations. If our active user growth rate continues to slow, we will become increasingly dependent on our ability to maintain or increase levels of user engagement and monetization in order to drive revenue growth.
We generate a substantial majority of our revenue from advertising. The loss of marketers, or reduction in spending by marketers with Facebook, could seriously harm our business.
The substantial majority of our revenue is currently generated from third parties advertising on Facebook. For the first six months of 2014 and 2013, advertising accounted for 91% and 87%, respectively, of our revenue. As is common in the industry, our marketers do not have long-term advertising commitments with us. Many of our marketers spend only a relatively small portion of their overall advertising budget with us. We expect our ability to grow advertising revenue will continue to be dependent on our ability to generate revenue from ads displayed on mobile devices. In addition, marketers may view some of our products as experimental and unproven. Marketers will not continue to do business with us, or they will reduce the prices they are willing to pay to advertise with us or the budgets they are willing to commit to us, if we do not deliver ads in an effective manner, or if they do not believe that their investment in advertising with us will generate a competitive return relative to other alternatives. Our advertising revenue could be adversely affected by a number of other factors, including:
decreases in user engagement, including time spent on Facebook;
our ability to continue to increase user access to and engagement with Facebook through our mobile products;
product changes or inventory management decisions we may make that change the size, frequency, or relative prominence of ads displayed on Facebook or of other unpaid content shared by marketers on Facebook;
our inability to maintain or increase marketer demand, the pricing of our ads, or both;
differences between the pricing of our ads displayed on personal computers and mobile devices;
our inability to maintain or increase the quality of ads shown to users, particularly on mobile devices;
the availability, accuracy, and utility of analytics and measurement solutions offered by us or third parties that demonstrate the value of our ads to marketers, or our ability to further improve such tools;
decisions by marketers to use our free products, such as Facebook Pages, instead of advertising on Facebook;
loss of advertising market share to our competitors, including if prices for purchasing ads on Facebook increase or if competitors offer lower priced or more integrated products;
adverse legal developments relating to advertising, including legislative and regulatory developments and developments in litigation;
decisions by marketers to reduce their advertising as a result of adverse media reports or other negative publicity involving us, content on Facebook, developers with Facebook-integrated mobile and web applications, or other companies in our industry;
our inability to improve our existing products or create new products that sustain or increase the value of our ads or marketers' ability to analyze and measure the value of our ads;
the degree to which users opt out of social ads;
the degree to which users cease or reduce the number of times they click on our ads;
changes in the way advertising on personal computers or on mobile devices is measured or priced;

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the impact of new technologies that could block or obscure the display of our ads; and
the impact of macroeconomic conditions or conditions in the advertising industry, in general.
The occurrence of any of these or other factors could result in a reduction in demand for our ads, which may reduce the prices we receive for our ads, or cause marketers to stop advertising with us altogether, either of which would negatively affect our revenue and financial results.
Mobile advertising is new and evolving and growth in the use of Facebook through our mobile products as a substitute for use on personal computers may negatively affect our revenue and financial results.
We had 1.07 billion mobile monthly active users (MAUs) in June 2014. While most of our mobile users also access Facebook through personal computers, we anticipate that growth in mobile users will continue to be the driver of our growth for the foreseeable future and that usage through personal computers will decline worldwide, including in key markets such as the United States and other developed markets in Europe and Asia. For example, during the fourth quarter of 2013, the number of mobile MAUs exceeded the number of MAUs using personal computers for the first time, and during the second quarter of 2014, the number of MAUs using personal computers declined compared to the prior quarter. While our mobile advertising revenue continues to grow and comprised over half of our overall advertising revenue in the second quarter of 2014, the mobile advertising market remains a new and evolving market. In addition, we do not currently offer our Payments infrastructure to applications on mobile devices. If users increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to continue to grow mobile revenues or successfully monetize mobile users, or if we incur excessive expenses in these efforts, our financial performance and ability to grow revenue would be negatively affected.
Our user growth, engagement, and monetization on mobile devices depend upon effective operation with mobile operating systems, networks, and standards that we do not control.
There is no guarantee that popular mobile devices will continue to feature Facebook, or that mobile device users will continue to use Facebook rather than competing products. We are dependent on the interoperability of Facebook with popular mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems and terms of service that degrade our products' functionality, reduce or eliminate our ability to distribute our products, give preferential treatment to competitive products, limit our ability to target or measure the effectiveness of ads, or impose fees or other charges related to our delivery of ads could adversely affect Facebook usage and monetization on mobile devices. Additionally, in order to deliver high quality mobile products, it is important that our products work well with a range of mobile technologies, systems, networks, and standards that we do not control. We may not be successful in maintaining or developing relationships with key participants in the mobile industry or in developing products that operate effectively with these technologies, systems, networks, or standards. In the event that it is more difficult for our users to access and use Facebook on their mobile devices, or if our users choose not to access or use Facebook on their mobile devices or use mobile products that do not offer access to Facebook, our user growth and user engagement could be harmed. From time to time, we may also take actions regarding the distribution of our products or the operation of our business based on what we believe to be in our long-term best interests. Such actions may adversely affect our relationships with the operators of mobile operating systems or other business partners, and there is no assurance that these actions will result in the anticipated long-term benefits. In the event that our relationships with operators of mobile operating systems or other business partners deteriorate, our user growth, engagement, and monetization could be adversely affected and our business could be harmed.
Our business is highly competitive. Competition presents an ongoing threat to the success of our business.
We face significant competition in every aspect of our business, including from companies that provide tools to facilitate the sharing of information, companies that enable marketers to display advertising and companies that provide development platforms for applications developers. We compete with companies that offer full-featured products that replicate the range of communications and related capabilities we provide. These offerings include, for example, Google+, which Google has integrated with certain of its products, including search and Android, as well as other, largely regional, social networks that have strong positions in particular countries. We also compete with companies that develop applications, particularly mobile applications, that provide social functionality, such as messaging, photo- and video-sharing, and micro-blogging, and companies that provide web- and mobile-based information and entertainment products and services that are designed to engage users and capture time spent online and on mobile devices. In addition, we face competition from traditional and online businesses that provide media for marketers to reach their audiences and/or develop tools and systems for managing and optimizing advertising campaigns.
Some of our current and potential competitors may have significantly greater resources or better competitive positions in certain product segments, geographic regions or user demographics than we do. These factors may allow our competitors to respond more effectively than us to new or emerging technologies and changes in market conditions. We believe that some of our users, particularly our younger users, are aware of and actively engaging with other products and services similar to, or as a substitute

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for, Facebook, and we believe that some of our users have reduced their engagement with Facebook in favor of increased engagement with these other products and services. For example, in the third quarter of 2013, the best data available to us suggested that while usage by U.S. teens overall was stable, DAUs among younger teens in the United States had declined. In the event that our users increasingly engage with other products and services, we may experience a decline in user engagement in key user demographics or more broadly and our business could be harmed.
Our competitors may develop products, features, or services that are similar to ours or that achieve greater acceptance, may undertake more far-reaching and successful product development efforts or marketing campaigns, or may adopt more aggressive pricing policies. In addition, developers whose mobile and web applications are integrated with Facebook may use information shared by our users through Facebook in order to develop products or features that compete with us. Certain competitors, including Google, could use strong or dominant positions in one or more markets to gain competitive advantage against us in areas where we operate, including: by integrating competing social networking platforms or features into products they control such as search engines, web browsers, or mobile device operating systems; by making acquisitions; by limiting or denying our access to advertising measurement or delivery systems; by limiting our ability to target or measure the effectiveness of ads; by imposing fees or other charges related to our delivery of ads; or by making access to our products more difficult. As a result, our competitors may acquire and engage users or generate advertising or other revenue at the expense of our own efforts, which may negatively affect our business and financial results.
We believe that our ability to compete effectively depends upon many factors both within and beyond our control, including:
the popularity, usefulness, ease of use, performance, and reliability of our products compared to our competitors' products, particularly with respect to mobile products;
the size and composition of our user base;
the engagement of our users with our products and competing products;
the timing and market acceptance of products, including developments and enhancements to our or our competitors' products;
our ability to monetize our products;
the frequency, size, quality, and relative prominence of the ads displayed by us or our competitors;
customer service and support efforts;
marketing and selling efforts, including our ability to provide marketers with a compelling return on their investments;
our ability to establish and maintain developers' interest in building mobile and web applications that integrate with Facebook;
changes mandated by legislation, regulatory authorities, or litigation, including settlements and consent decrees, some of which may have a disproportionate effect on us;
acquisitions or consolidation within our industry, which may result in more formidable competitors;
our ability to attract, retain, and motivate talented employees, particularly software engineers, designers, and product managers;
our ability to cost-effectively manage and grow our operations; and
our reputation and brand strength relative to those of our competitors.
If we are not able to compete effectively, our user base and level of user engagement may decrease, we may become less attractive to developers and marketers, and our revenue and results of operations may be materially and adversely affected.

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We may not be successful in our efforts to grow usage of and engagement with mobile and web applications that integrate with Facebook.
We have made and are continuing to make investments to enable developers to build mobile and web applications that integrate with Facebook. Such existing and prospective developers may not be successful in building mobile and/or web applications that create and maintain user engagement. Additionally, developers may choose to build on other platforms, including mobile platforms controlled by third parties, rather than building products that integrate with Facebook. We are continuously seeking to balance the distribution objectives of our developers with our desire to provide an optimal user experience, and we may not be successful in achieving a balance that continues to attract and retain such developers. For example, from time to time, we have taken actions to reduce the volume of communications from these developers to users on Facebook with the objective of enhancing the user experience, and such actions have reduced distribution from, user engagement with, and our monetization opportunities from, Facebook-integrated mobile and web applications. In some instances, these actions, as well as other actions to enforce our policies applicable to developers, have adversely affected our relationships with such developers. If we are not successful in our efforts to grow the number of developers that choose to build products that integrate with Facebook or if we are unable to build and maintain good relations with such developers, our user growth and user engagement and our financial results may be adversely affected.
We may not be successful in our efforts to further monetize how developers use Facebook, and our Payments revenue may decline in the future in the event that usage of Facebook on personal computers continues to decline.
We currently generate revenue from developers that use Facebook in several ways, including ads on pages generated by developers' applications on the Facebook website, direct advertising on Facebook purchased by developers to drive traffic to their mobile and web applications, and fees from developers' use of our Payments infrastructure to sell virtual and digital goods to users accessing Facebook via personal computers. Applications built by developers of social games are currently responsible for substantially all of our revenue derived from Payments, and the majority of the revenue from these applications has historically been generated by a limited number of the most popular games. In addition, a relatively small percentage of our users have transacted with Facebook Payments. If the Facebook-integrated applications that currently generate revenue fail to grow or maintain their users and engagement, whether as a result of a decline in the usage of Facebook on personal computers or otherwise, if developers do not continue to introduce new applications that attract users and create engagement on Facebook, if developers reduce their advertising on Facebook, if we fail to maintain good relationships with existing developers or to attract new developers who build products that integrate with Facebook, or if Facebook-integrated applications outside of social games do not gain popularity and generate significant revenue for us, our financial performance and ability to grow revenue could be adversely affected.
Additionally, we are actively supporting developers' efforts to develop their own mobile and web applications that integrate with Facebook. Unlike applications that run within the Facebook website which enable us to show ads and offer Payments, we generally do not directly monetize from developers' integrating their own mobile and web applications with Facebook. Therefore, our developers' efforts to prioritize their own mobile or web applications may reduce or slow the growth of our user activity that generates advertising and Payments opportunities, which could negatively affect our revenue. Although we believe that there are significant long-term benefits to Facebook resulting from increased engagement on Facebook-integrated mobile and web applications, these benefits may not offset the possible loss of revenue, in which case our business could be harmed.
Action by governments to restrict access to Facebook in their countries could substantially harm our business and financial results.
It is possible that governments of one or more countries may seek to censor content available on Facebook in their country, restrict access to Facebook from their country entirely, or impose other restrictions that may affect the accessibility of Facebook in their country for an extended period of time or indefinitely. For example, access to Facebook has been or is currently restricted in whole or in part in China, Iran, and North Korea. In addition, governments in other countries may seek to restrict access to Facebook if they consider us to be in violation of their laws. In the event that access to Facebook is restricted, in whole or in part, in one or more countries or our competitors are able to successfully penetrate geographic markets that we cannot access, our ability to retain or increase our user base and user engagement may be adversely affected, we may not be able to maintain or grow our revenue as anticipated, and our financial results could be adversely affected.

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Our new products and changes to existing products could fail to attract or retain users or generate revenue.
Our ability to retain, increase, and engage our user base and to increase our revenue depends heavily on our ability to create successful new products, both independently and in conjunction with developers or other third parties. We may introduce significant changes to our existing products or develop and introduce new and unproven products, including using technologies with which we have little or no prior development or operating experience. For example, we recently completed our acquisition of Oculus VR, Inc. (Oculus), a company developing virtual reality technology. We do not have prior experience with consumer hardware products or virtual reality technology, which may adversely affect our ability to successfully develop and market Oculus' products or technology. If new or enhanced products fail to engage users, developers, or marketers, we may fail to attract or retain users or to generate sufficient revenue, operating margin, or other value to justify our investments, and our business may be adversely affected. In the future, we may invest in new products and initiatives to generate revenue, but there is no guarantee these approaches will be successful. For example, we began showing ads on Instagram in the United States in late 2013 and we cannot assure you that these ads will generate meaningful revenue for our business. If we are not successful with new products or new approaches to monetization, we may not be able to maintain or grow our revenue as anticipated or recover any associated development costs, and our financial results could be adversely affected.
We prioritize user growth and engagement and the user experience over short-term financial results.
We frequently make product decisions that may reduce our short-term revenue or profitability if we believe that the decisions are consistent with our mission and benefit the aggregate user experience and will thereby improve our financial performance over the long term. For example, from time to time we may change the size, frequency, or relative prominence of ads in order to improve ad quality and overall user experience. Similarly, from time to time we update our News Feed ranking algorithm to deliver the most relevant content to our users, which may adversely affect the distribution of content of marketers and developers and could reduce their incentive to invest in their development and marketing efforts on Facebook. We also may introduce changes to existing products, or introduce new stand-alone products, that direct users away from properties where we have a proven means of monetization. For example, we have taken action to redirect users who send messages from within the Facebook application to our stand-alone Messenger application, although we currently do not monetize the stand-alone Messenger application. In addition, we plan to focus on growing the user base for Instagram and potentially other stand-alone applications that may have limited or no monetization, and it is possible that these efforts may reduce engagement with the core Facebook application. These decisions may not produce the long-term benefits that we expect, in which case our user growth and engagement, our relationships with marketers and developers, and our business and results of operations could be harmed.
If we are not able to maintain and enhance our brand, or if events occur that damage our reputation and brand, our ability to expand our base of users, marketers, and developers may be impaired, and our business and financial results may be harmed.
We believe that the Facebook brand has significantly contributed to the success of our business. We also believe that maintaining and enhancing our brand is critical to expanding our base of users, marketers, and developers. Many of our new users are referred by existing users. Maintaining and enhancing our brand will depend largely on our ability to continue to provide useful, reliable, trustworthy, and innovative products, which we may not do successfully. We may introduce new products or terms of service that users do not like, which may negatively affect our brand. Additionally, the actions of our developers may affect our brand if users do not have a positive experience using third-party mobile and web applications integrated with Facebook. We will also continue to experience media, legislative, or regulatory scrutiny of our decisions regarding user privacy or other issues, which may adversely affect our reputation and brand. We also may fail to provide adequate customer service, which could erode confidence in our brand. Our brand may also be negatively affected by the actions of users that are deemed to be hostile or inappropriate to other users, or by users acting under false or inauthentic identities, or by perceived or actual efforts by governments to obtain access to user information for security-related purposes. Maintaining and enhancing our brand may require us to make substantial investments and these investments may not be successful. Certain of our past actions have eroded confidence in our brand, and if we fail to successfully promote and maintain the Facebook brand or if we incur excessive expenses in this effort, our business and financial results may be adversely affected.

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Improper access to or disclosure of user information, or violation of our terms of service or policies, could harm our reputation and adversely affect our business.
Our Data Use Policy governs the collection and use of information we receive in connection with our services. Our efforts to protect the information we receive may be unsuccessful due to the actions of third parties, software bugs or other technical malfunctions, employee error or malfeasance, government surveillance, or other factors. In addition, third parties may attempt to fraudulently induce employees or users to disclose information in order to gain access to our data or our users' data. If any of these events occur, our users' information could be accessed or disclosed improperly. Some of our developers or other partners, such as those that help us measure the effectiveness of ads, may receive or store information provided by us or by our users through mobile or web applications integrated with Facebook. If these third parties or developers fail to adopt or adhere to adequate data security practices or fail to comply with our terms and policies, or in the event of a breach of their networks, our users' data may be improperly accessed, used, or disclosed.
Any incidents involving unauthorized access to or improper use of user information or incidents involving violation of our terms of service or policies, including our Data Use Policy, could damage our reputation and our brand and diminish our competitive position. In addition, the affected users or government authorities could initiate legal or regulatory actions against us in connection with such incidents, which could cause us to incur significant expense and liability or result in orders or consent decrees forcing us to modify our business practices. Any of these events could have a material and adverse effect on our business, reputation, or financial results.
Unfavorable media coverage could negatively affect our business.
We receive a high degree of media coverage around the world. Unfavorable publicity regarding, for example, our privacy practices, product changes, product quality, litigation or regulatory activity, government surveillance, the actions of our developers whose products are integrated with Facebook, the actions of our users, or the actions of other companies that provide similar services to us, could adversely affect our reputation. Such negative publicity also could have an adverse effect on the size, engagement, and loyalty of our user base and result in decreased revenue, which could adversely affect our business and financial results.
Our financial results will fluctuate from quarter to quarter and are difficult to predict.