Edgar Filing: Facebook Inc

FB-9.30.2012-10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________

FORM 10-Q

____________________________________________

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

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) 308-7300

(Registrant’s telephone number, including area code)

____________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	x (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.



Class	Number of Shares Outstanding
Class A Common Stock $0.000006 par value	1,099,471,393 shares outstanding as of October 22, 2012
Class B Common Stock $0.000006 par value	1,066,955,915 shares outstanding as of October 22, 2012

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FACEBOOK, INC.

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		Page No.

Note About Forward-Looking Statements		3

PART I—FINANCIAL INFORMATION		4

Item 1.	Financial Statements (unaudited)	4

	Condensed Consolidated Balance Sheets—September 30, 2012 and December 31, 2011	4

	Condensed Consolidated Statements of Operations—for the three months and nine months ended September 30, 2012 and 2011	5

	Condensed Consolidated Statements of Comprehensive (Loss) Income —for the three months and nine months ended September 30, 2012 and 2011	6

	Condensed Consolidated Statements of Cash Flows—for the nine months ended September 30, 2012 and 2011	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	33

PART II—OTHER INFORMATION		34

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 6.	Exhibits	53

SIGNATURES		54

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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.

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PART I—FINANCIAL INFORMATION


Item 1.	Financial Statements

FACEBOOK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except for number of shares and par value)

(Unaudited)



	September 30, 2012			December 31, 2011
Assets
Current assets:
Cash and cash equivalents	$	2,478		$	1,512
Marketable securities	7,974			2,396
Accounts receivable, net of allowances for doubtful accounts of $18 and $17 as of September 30, 2012 and December 31, 2011, respectively	635			547
Income tax refundable	567			—
Prepaid expenses and other current assets	631			149
Total current assets	12,285			4,604
Property and equipment, net	2,289			1,475
Goodwill and intangible assets, net	1,423			162
Other assets	41			90
Total assets	$	16,038		$	6,331
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	59		$	63
Platform partners payable	155			171
Accrued expenses and other current liabilities	409			296
Deferred revenue and deposits	85			90
Current portion of capital lease obligations	372			279
Total current liabilities	1,080			899
Capital lease obligations, less current portion	530			398
Other liabilities	254			135
Total liabilities	1,864			1,432
Stockholders’ equity:
Convertible preferred stock, $0.000006 par value, issuable in series; no shares and 569 million shares authorized as of September 30, 2012 and December 31, 2011, respectively, no shares and 543 million shares issued and outstanding as of September 30, 2012 and December 31, 2011, respectively	—			615
Common stock, $0.000006 par value; 5,000 million and 4,141 million Class A shares authorized as of September 30, 2012 and December 31, 2011, respectively, 949 million and 117 million shares issued and outstanding as of September 30, 2012 and December 31, 2011, respectively, including 2 million and 1 million outstanding shares subject to repurchase as of September 30, 2012 and December 31, 2011, respectively; 4,141 million Class B shares authorized, 1,217 million and 1,213 million shares issued and outstanding as of September 30, 2012 and December 31, 2011, respectively, including 12 million and 2 million outstanding shares subject to repurchase as of September 30, 2012 and December 31, 2011, respectively	—			—
Additional paid-in capital	12,585			2,684
Accumulated other comprehensive loss	(6		)	(6		)
Retained earnings	1,595			1,606
Total stockholders’ equity	14,174			4,899
Total liabilities and stockholders’ equity	$	16,038		$	6,331

See Accompanying Notes to Condensed Consolidated Financial Statements.

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FACEBOOK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenue	$	1,262		$	954		$	3,504		$	2,580
Costs and expenses:
Cost of revenue	322			236			967			613
Research and development	244			108			1,102			264
Marketing and sales	168			114			703			272
General and administrative	151			82			717			222
Total costs and expenses	885			540			3,489			1,371
Income from operations	377			414			15			1,209
Interest and other income (expense), net:
Interest expense	(11		)	(10		)	(35		)	(26		)
Other income (expense), net	6			(25		)	9			(7		)
Income (loss) before provision for income taxes	372			379			(11		)	1,176
Provision for income taxes	431			152			—			478
Net (loss) income	$	(59	)	$	227		$	(11	)	$	698
Less: Net income attributable to participating securities	—			77			—			235
Net (loss) income attributable to Class A and Class B common stockholders	$	(59	)	$	150		$	(11	)	$	463
(Loss) earnings per share attributable to Class A and Class B common stockholders:
Basic	$	(0.02	)	$	0.11		$	(0.01	)	$	0.36
Diluted	$	(0.02	)	$	0.10		$	(0.01	)	$	0.32
Weighted average shares used to compute (loss) earnings per share attributable to Class A and Class B common stockholders:
Basic	2,420			1,316			1,884			1,283
Diluted	2,420			1,520			1,884			1,507
Share-based compensation expense included in costs and expenses:
Cost of revenue	$	8		$	3		$	79		$	6
Research and development	114			33			719			72
Marketing and sales	28			13			279			24
General and administrative	29			21			311			39
Total share-based compensation expense	$	179		$	70		$	1,388		$	141

See Accompanying Notes to Condensed Consolidated Financial Statements.

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FACEBOOK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In millions)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Net (loss) income	$	(59	)	$	227		$	(11	)	$	698
Other comprehensive income (loss):
Foreign currency translation adjustment	21			(2		)	(1		)	(1		)
Change in unrealized gain on available-for-sale investments, net of tax	2			—			1			—
Comprehensive (loss) income	$	(36	)	$	225		$	(11	)	$	697

See Accompanying Notes to Condensed Consolidated Financial Statements.

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FACEBOOK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)



	Nine Months Ended September 30,
	2012			2011
Cash flows from operating activities
Net (loss) income	$	(11	)	$	698
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	425			220
Loss on write-off of equipment	8			6
Share-based compensation	1,388			141
Deferred income taxes	(434		)	(29		)
Tax benefit from share-based award activity	854			405
Excess tax benefit from share-based award activity	(854		)	(405		)
Changes in assets and liabilities:
Accounts receivable	(90		)	(72		)
Income tax refundable	(567		)	—
Prepaid expenses and other current assets	24			(113		)
Other assets	—			(25		)
Accounts payable	20			36
Platform partners payable	(16		)	91
Accrued expenses and other current liabilities	162			(9		)
Deferred revenue and deposits	(5		)	44
Other liabilities	27			51
Net cash provided by operating activities	931			1,039
Cash flows from investing activities
Purchases of property and equipment	(1,037		)	(421		)
Purchases of marketable securities	(8,590		)	(2,742		)
Sales of marketable securities	571			95
Maturities of marketable securities	2,413			90
Investments in non-marketable equity securities	(3		)	(2		)
Acquisitions of businesses, net of cash acquired, and purchases of intangible and other assets	(911		)	(5		)
Change in restricted cash and deposits	(2		)	5
Net cash used in investing activities	(7,559		)	(2,980		)
Cash flows from financing activities
Net proceeds from issuance of common stock	6,760			998
Proceeds from exercise of stock options	9			27
Repayment of long term debt	—			(250		)
Proceeds from sale and lease-back transactions	205			15
Principal payments on capital lease obligations	(231		)	(128		)
Excess tax benefit from share-based award activity	854			405
Net cash provided by financing activities	7,597			1,067
Effect of exchange rate changes on cash and cash equivalents	(3		)	(5		)
Net increase (decrease) in cash and cash equivalents	966			(879		)
Cash and cash equivalents at beginning of period	1,512			1,785
Cash and cash equivalents at end of period	$	2,478		$	906

Supplemental cash flow data
Cash paid during the period for:
Interest	$	30		$	19
Income taxes	$	184		$	179
Non-cash investing and financing activities:
Net change in accounts payable and accrued expenses and other current liabilities related to property and equipment additions	$	(80	)	$	62
Property and equipment acquired under capital leases	$	251		$	393
Fair value of shares issued related to acquisitions of businesses and other assets	$	275		$	46

See Accompanying Notes to Condensed Consolidated Financial Statements.

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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 (SEC) 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 prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on May 18, 2012 (Prospectus).

The condensed consolidated balance sheet as of December 31, 2011, 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 unaudited 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, 2012.

We have reclassified certain prior period expense amounts from marketing and sales to general and administrative within our condensed consolidated statements of operations to conform to our current period presentation. These reclassifications did not affect revenue, total costs and expenses, income from operations, or net (loss) income.

There have been no changes to our significant accounting policies described in the Prospectus that have had a material impact on our condensed consolidated financial statements and related notes.

Initial Public Offering and Share-based Compensation

In May 2012, we completed our initial public offering (IPO) in which we issued and sold 180 million shares of Class A common stock at a public offering price of $38.00 per share. We received net proceeds of $6.8 billion after deducting underwriting discounts and commissions of $75 million and other offering expenses of approximately $7 million. Upon the closing of the IPO, all shares of our then-outstanding convertible preferred stock automatically converted into an aggregate of 545 million shares of Class B common stock and an aggregate of 336 million shares of Class B common stock converted into Class A common stock.

Restricted stock units (RSUs) granted prior to January 1, 2011 (Pre-2011 RSUs) vest upon the satisfaction of both a service condition and a liquidity condition. The service condition for the majority of these awards is satisfied over four years. The liquidity condition is satisfied upon the occurrence of a qualifying event, defined as a change of control transaction or six months following the completion of our IPO, which occurred in May 2012. The vesting condition that will be satisfied six months following our IPO does not affect the expense attribution period for the RSUs for which the service condition has been met as of the date of our IPO. This six-month period is not a substantive service condition and, accordingly, beginning on the effectiveness of our IPO in May 2012, we recognized a cumulative share-based compensation expense for the portion of the RSUs that had met the service condition. In the three and nine months ended September 30, 2012, we recognized $28 million and $1,014 million, respectively, of share-based compensation expense related to our Pre-2011 RSUs. As of September 30, 2012, we had approximately $164 million of additional future period share-based compensation expense related to our Pre-2011 RSUs to be recognized over a weighted-average period of approximately two years.

RSUs granted on or after January 1, 2011 (Post-2011 RSUs) are not subject to a liquidity condition in order to vest, and compensation expense related to these grants is based on the grant date fair value of the RSUs and is recognized on a straight-line basis over the applicable service period. The majority of Post-2011 RSUs are earned over a service period of four to five years. In the three and nine months ended September 30, 2012, we recognized $138 million and $348 million, respectively, and in the three and nine months ended September 30, 2011, we recognized $59 million and $117 million, respectively, of share-based compensation expense related to the Post-2011 RSUs. As of September 30, 2012 we anticipate $1,871 million of future period expense related to such RSUs will be recognized over a weighted-average period of approximately three years.

As of September 30, 2012, there was $2,302 million of unrecognized share-based compensation expense, of which $2,035 million relates to RSUs, and $267 million relates to restricted shares and stock options. This unrecognized compensation expense

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is expected to be recognized over a weighted-average period of approximately three years.

Under settlement procedures applicable to the Pre-2011 RSUs, we are permitted to deliver the underlying shares within 30 days before or after the date on which the liquidity condition is satisfied. We previously disclosed in our Current Report on Form 8-K filed with the SEC on September 4, 2012 that we will vest and settle outstanding Pre-2011 RSUs for which the service condition has been satisfied and that are held by employees who were employed by us through October 15, 2012 on October 25, 2012 and such shares will be eligible for sale in the public markets as of market open on October 29, 2012. We will vest and settle outstanding Pre-2011 RSUs held by our non-employee directors and former employees on November 14, 2012.

On the settlement dates, we plan to withhold and remit income taxes for RSU holders at applicable minimum statutory rates based on the closing price of our common stock on the trading day immediately preceding the applicable settlement date. We currently expect that the average of these withholding tax rates will be approximately 45%. If the price of our common stock on the trading day immediately preceding the applicable settlement date were equal to $21.66, the closing price of our Class A common stock on September 30, 2012, we estimate that this tax obligation would be approximately $2.6 billion in the aggregate. The amount of this obligation could be higher or lower, depending on the closing price of our shares on the trading day immediately preceding the applicable settlement date. To settle these RSUs, assuming an approximate 45% tax withholding rate, we estimate that we will net settle by delivering approximately 121 million shares of Class B common stock and withholding approximately 99 million shares of Class B common stock on October 25, 2012 and by delivering approximately 31 million shares of Class B common stock and withholding approximately 20 million shares of Class B common stock on November 14, 2012.

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 share-based awards, 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.


Note 2.	Acquisitions

In August 2012, we completed our acquisition of Instagram, Inc. (Instagram), a privately-held company which has built a mobile phone-based photo-sharing service that is expected to enhance our photos product offerings and to enable users to increase their levels of mobile engagement and photo sharing. We have accounted for this transaction as a business acquisition for a total purchase price of $521 million, consisting of the issuance of approximately 12 million vested shares of our Class B common stock to non-employee stockholders of Instagram and $300 million in cash. The value of the equity component of the purchase price was determined for accounting purposes based on the fair value of our common stock on the closing date. We also issued approximately 11 million unvested shares of our Class B common stock to employee stockholders of Instagram on the closing date, with an aggregate fair value of $194 million, which will be recognized as they vest over a three-year service period as share-based compensation expense.

During the nine months ended September 30, 2012, we also completed other business acquisitions for total consideration of $87 million. These acquisitions were not material to our condensed consolidated financial statements individually or in the aggregate. Pro forma results of operations related to our acquisition of Instagram or of other companies during the nine months ended September 30, 2012 have not been presented because they are not material to our condensed consolidated statements of operations, either individually or in the aggregate.

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The fair value of assets acquired and liabilities assumed for all acquisitions completed during the nine months ended September 30, 2012 was based upon a preliminary valuation and our estimates and assumptions are subject to change within the measurement period. The primary areas of the purchase price that are not yet finalized are related to income taxes and residual goodwill. Measurement period adjustments that we determine to be material will be applied retrospectively to the period of acquisition in our condensed consolidated financial statements and, depending on the nature of the adjustments, other periods subsequent to the period of acquisition could also be affected.

The following table summarizes the allocation of estimated fair values of the assets acquired and liabilities assumed, including those items that are still preliminary allocations, and related useful lives, where applicable:



	Instagram, Inc.				Other
	(in millions)			Useful lives (in years)	(in millions)			Useful lives (in years)
Amortizable intangible assets:
Acquired technology	$	74		5	$	19		3 - 5
Tradename and other	63			2 - 7	8			2 - 3
Net liabilities assumed	(1		)		(4		)
Deferred tax liabilities	(50		)		(9		)
Net assets acquired	$	86			$	14
Goodwill	$	435			$	73
Total fair value considerations	$	521			$	87

Goodwill generated from all business acquisitions completed during the nine months ended September 30, 2012 is primarily attributable to expected synergies from future growth and potential monetization opportunities and is not deductible for tax purposes.

During the nine months ended September 30, 2012, we also acquired $633 million of patents and other intellectual property rights. We completed the largest of these intangible asset purchases in June 2012 under an agreement with Microsoft Corporation pursuant to which we were assigned Microsoft’s rights to acquire approximately 615 U.S. patents and patent applications and certain of their foreign counterparts, consisting of approximately 170 foreign patents and patent applications, that were subject to an agreement between AOL Inc. and Microsoft entered into on April 5, 2012. We paid $550 million in cash in exchange for these patents and patent applications. As part of this transaction, we established a deferred tax liability of $49 million to reflect the difference between the future tax basis and book basis in the acquired patents and patent applications, which also increased the capitalized patent cost by this amount. As part of this transaction, we obtained a license to the other AOL patents and patent applications being purchased by Microsoft and granted Microsoft a license to the AOL patents and patent applications that we acquired. The acquisitions of these patents, patent applications and other intellectual property rights were accounted for as asset acquisitions. Patents acquired during the nine months ended September 30, 2012 have estimated useful lives ranging from three to 17 years from the dates of acquisition.


Note 3.	(Loss) Earnings per Share

We compute (loss) earnings per share (EPS) of Class A and Class B common stock using the two-class method required for participating securities. Prior to the date of the IPO, we considered all series of our convertible preferred stock to be participating securities due to their non-cumulative dividend rights. Immediately after the completion of our IPO in May 2012, all outstanding shares of convertible preferred stock converted to Class B common stock. Additionally, we consider restricted stock awards to be participating securities, because holders of such shares have non-forfeitable dividend rights in the event of our declaration of a dividend for common shares.

Undistributed earnings allocated to these participating securities are subtracted from net income in determining net income attributable to common stockholders. Net losses are not allocated to these participating securities. Basic EPS is computed by dividing net (loss) 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.

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 from Class B common stock, while the diluted EPS of Class B common stock does not assume the conversion of those shares. Diluted EPS attributable to common stockholders is computed by dividing the

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resulting net income attributable to common stockholders by the weighted-average number of fully diluted common shares outstanding.

Dilutive securities in our diluted EPS calculation for the three and nine months ended September 30, 2011 do not include Pre-2011 RSUs. Vesting of these RSUs is dependent upon the satisfaction of both a service condition and a liquidity condition. The liquidity condition is satisfied upon the occurrence of a qualifying event, defined as a change of control transaction or six months following the completion of our IPO. Our IPO did not occur until May 2012. Therefore, prior to this date the holders of these RSUs had no rights in our undistributed earnings and accordingly, they are excluded from the effect of basic and dilutive securities. However, subsequent to the completion of our IPO in May 2012, these RSUs are included in our basic and diluted EPS calculation. Post-2011 RSUs are not subject to a liquidity condition in order to vest, and are thus included in the calculation of diluted EPS. For the three and nine months ended September 30, 2012 in which we reported a net loss, we did not allocate any loss to participating securities in the basic and diluted EPS computation. Additionally, we did not include employee stock options, unvested RSUs, and shares subject to repurchase in our calculation of diluted EPS, as the impact of these awards is 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.

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The numerators and denominators of the basic and diluted EPS computations for our common stock are calculated as follows (in millions, except per share amounts):



	Three Months Ended September 30,										Nine Months Ended September 30,
	2012						2011				2012						2011
	Class A			Class B			Class A		Class B		Class A			Class B			Class A		Class B
Basic EPS:
Numerator
Net (loss) income	$	(19	)	$	(40	)	$	19	$	208	$	(3	)	$	(8	)	$	58	$	640
Less: Net income attributable to participating securities	—			—			7		70		—			—			20		215
Net (loss) income attributable to common stockholders	$	(19	)	$	(40	)	$	12	$	138	$	(3	)	$	(8	)	$	38	$	425
Denominator
Weighted average shares outstanding	794			1,632			113		1,208		431			1,457			107		1,181
Less: Shares subject to repurchase	1			5			1		4		1			3			—		5
Number of shares used for basic EPS computation	793			1,627			112		1,204		430			1,454			107		1,176
Basic EPS	$	(0.02	)	$	(0.02	)	$	0.11	$	0.11	$	(0.01	)	$	(0.01	)	$	0.36	$	0.36
Diluted EPS:
Numerator
Net (loss) income attributable to common stockholders	$	(19	)	$	(40	)	$	12	$	138	$	(3	)	$	(8	)	$	38	$	425
Reallocation of net income attributable to participating securities	—			—			6		—		—			—			22		—
Reallocation of net (loss) income as a result of conversion of Class B to Class A common stock	(40		)	—			138		—		(8		)	—			425		—
Reallocation of net income to Class B common stock	—			—			—		8		—			—			—		26
Net (loss) income attributable to common stockholders for diluted EPS	$	(59	)	$	(40	)	$	156	$	146	$	(11	)	$	(8	)	$	485	$	451
Denominator
Number of shares used for basic EPS computation	793			1,627			112		1,204		430			1,454			107		1,176
Conversion of Class B to Class A common stock	1,627			—			1,204		—		1,454			—			1,176		—
Weighted average effect of dilutive securities:
Employee stock options	—			—			188		188		—			—			212		212
RSUs	—			—			10		10		—			—			5		5
Shares subject to repurchase	—			—			4		4		—			—			4		4
Warrants	—			—			2		2		—			—			3		3
Number of shares used for diluted EPS computation	2,420			1,627			1,520		1,408		1,884			1,454			1,507		1,400
Diluted EPS	$	(0.02	)	$	(0.02	)	$	0.10	$	0.10	$	(0.01	)	$	(0.01	)	$	0.32	$	0.32

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Note 4.	Property and Equipment

Property and equipment consisted of the following (in millions):



	September 30, 2012			December 31, 2011
Network equipment	$	1,628		$	1,016
Land	35			34
Buildings	454			355
Leasehold improvements	163			120
Computer software, office equipment and other	88			73
Construction in progress	655			327
Total	3,023			1,925
Accumulated depreciation and amortization	(734		)	(450		)
Property and equipment, net	$	2,289		$	1,475

Construction in progress includes costs primarily related to the construction of data centers and equipment located in our new data centers in Oregon, North Carolina and Sweden.


Note 5.	Goodwill and Other Intangible Assets

Goodwill and other intangible assets, and related useful lives, where applicable, consisted of the following (in millions, except indicated otherwise):



	Useful lives from date of acquisitions (in years)	September 30, 2012			December 31, 2011
Amortizable intangible assets:
Acquired patents	3 - 18	$	684		$	51
Acquired technology	2 - 10	131			38
Tradename and other	2 - 7	94			23
Accumulated amortization		(76		)	(32		)
Net acquired intangible assets		833			80
Goodwill		590			82
Goodwill and intangible assets		$	1,423		$	162

Amortization expense of intangible assets for the three and nine months ended September 30, 2012 was $31 million and $44 million, respectively, and for the three and nine months ended September 30, 2011 was $5 million and $15 million, respectively.

Estimated amortization expense for the unamortized acquired intangible assets as of September 30, 2012 for the next five years and thereafter is as follows (in millions):



The remainder of 2012	$	34
2013	126
2014	120
2015	112
2016	101
2017	85
Thereafter	255
	$	833

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Note 6.	Fair Value Measurements

Assets measured at fair value on a recurring basis are summarized below (in millions):



			Fair Value Measurement at Reporting Date Using
Description	September 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents:
Money market funds	$	730	$	730	$	—	$	—
U.S. government securities	234		234		—		—
U.S. government agency securities	208		208		—		—
Marketable securities:
U.S. government securities	5,644		5,644		—		—
U.S. government agency securities	2,330		2,330		—		—
Total cash equivalents and marketable securities	$	9,146	$	9,146	$	—	$	—



			Fair Value Measurement at Reporting Date Using
Description	December 31, 2011		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	$	892	$	892	$	—	$	—
U.S. government securities	60		60		—		—
U.S. government agency securities	50		50		—		—
Marketable securities:
U.S. government securities	1,415		1,415		—		—
U.S. government agency securities	981		981		—		—
Total cash equivalents and marketable securities	$	3,398	$	3,398	$	—	$	—

Gross unrealized gains or losses for cash equivalents and marketable securities as of September 30, 2012 and December 31, 2011 were not material.

The following table classifies our marketable securities by contractual maturities as of September 30, 2012 (in millions):



	Fair Value
Due in one year	$	5,658
Due in one to two years	2,316
	$	7,974


Note 7.	Commitments and Contingencies

Leases

We have 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 building leases which are for 15 years, with interest rates ranging from 1% to 13%. The leases are secured by the underlying leased buildings 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 2012 and 2027. We are committed to pay a portion of the related actual operating expenses

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under certain of these lease agreements. Certain of these arrangements have free rent periods and/or escalating rent payment provisions, and we recognize rent expense under such arrangements on a straight-line basis.

Operating lease expense totaled $50 million and $151 million for the three and nine months ended September 30, 2012, and $52 million and $171 million for the three and nine months ended September 30, 2011.

Contingencies

Legal Matters

On March 12, 2012, Yahoo filed a lawsuit against us in the U.S. District Court for the Northern District of California, claiming that we infringe ten of Yahoo’s patents that Yahoo claimed relate to “advertising,” “social networking,” “privacy,” “customization,” and “messaging,” and on April 27, 2012 Yahoo added two patents to the lawsuit that Yahoo claims relate to “advertising.” Yahoo sought unspecified damages, a damage multiplier for alleged willful infringement, and an injunction. On April 3, 2012, we filed our answer with respect to this complaint and asserted counterclaims that Yahoo’s products infringe ten of our patents. On July 6, 2012, the parties entered into a settlement agreement resolving all claims made in the litigation. On July 9, 2012, the parties filed a stipulated dismissal of the litigation with the U.S. District Court for the Northern District of California and this litigation was dismissed on July 10, 2012. We have no payment obligations under this settlement agreement.

Beginning on May 22, 2012, multiple putative class actions, derivative actions, and individual actions were filed in state and federal courts in the United States and in other jurisdictions against us, our directors, and/or certain of our officers alleging violation of securities laws or breach of fiduciary duties in connection with our IPO and seeking unspecified damages. We believe these lawsuits are without merit, and we intend to continue to vigorously defend them. On October 4, 2012, on our motion, the vast majority of the cases in the United States, along with multiple cases filed against The NASDAQ OMX Group, Inc. and The Nasdaq Stock Market LLC (collectively referred to herein as NASDAQ) alleging technical and other trading-related errors by NASDAQ in connection with our IPO, were ordered centralized for coordinated or consolidated pre-trial proceedings in the United States District Court for the Southern District of New York. In addition, the events surrounding our IPO have become the subject of various government inquiries, and we are cooperating with those inquiries.

We are also party to various legal proceedings and claims which arise in the ordinary course of business.

In the opinion of management, there was not at least a reasonable possibility we may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies relating to the matters set forth above. However, the outcome of litigation is inherently uncertain. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against us in the same reporting period for amounts in excess of management’s expectations, our condensed consolidated financial statements of a particular reporting period could be materially adversely affected.

Credit Facilities

In February 2012, we entered into an agreement for an unsecured five-year revolving credit facility that allows us to borrow up to $5,000 million for general corporate purposes, with interest payable on the borrowed amounts set at London Interbank Offered Rate (LIBOR) plus 1.0%. Under the terms of the agreement, we are obligated to pay a commitment fee of 0.10% per annum on the daily undrawn balance. No amounts were drawn down under this credit facility as of September 30, 2012.

Concurrent with our entering into the revolving credit facility, we also entered into a bridge credit facility agreement that allows us to borrow up to $3,000 million to fund tax withholding and remittance obligations related to the settlement of RSUs in connection with our IPO, with interest payable on the borrowed amounts set at LIBOR plus 1.0% and an additional 0.25% payable on drawn balances outstanding from and after the 180th day of borrowing. Any amounts outstanding under this facility will be due one year after the date we draw on the facility but no later than June 30, 2014. Under the terms of the agreement, we are obligated to pay a commitment fee of 0.10% per annum on the daily undrawn balance from and after the 90th day following the date we entered into the bridge facility. In October 2012, we amended and restated our existing bridge credit facility (the Amended and Restated Term Loan) and converted it into a three-year unsecured term loan facility that allows us to borrow up to $1,500 million. See Note 11 Subsequent Event for information on the Amended and Restated Term Loan.

No amounts were drawn down under the bridge credit facility agreement as of September 30, 2012.

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Note 8.	Stockholders’ Equity

Share-based Compensation Plans

We maintain three share-based employee compensation plans: the 2012 Equity Incentive Plan, the 2005 Stock Plan and the 2005 Officers’ Stock Plan (Stock Plans). In January 2012, our board of directors approved our 2012 Equity Incentive Plan (2012 Plan), and in April 2012 our stockholders adopted the 2012 Plan, effective on May 17, 2012, which serves as the successor to our 2005 Stock Plan and provides for the issuance of incentive and nonstatutory stock options, restricted stock awards, stock appreciation rights, RSUs, performance shares and stock bonuses to qualified employees, directors and consultants. No new awards will be issued under the 2005 Stock Plan as of the effective date of the 2012 Plan. Outstanding awards under the 2005 Stock Plan continue to be subject to the terms and conditions of the 2005 Stock Plan. 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, were added to the reserves of the 2012 Plan.

We have initially reserved 25,000,000 shares of our Class A common stock for issuance under our 2012 Plan. The number of shares reserved for issuance under our 2012 Plan will increase automatically on the first day of January of each of 2013 through 2022 by a number of shares of Class A common stock equal to (i) the lesser of 2.5% of the total outstanding shares our common stock as of the immediately preceding December 31st or (ii) a number of shares determined by the board of directors. 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.

The 2005 Officers’ Stock Plan provides for the issuance of up to 120,000,000 shares of incentive and nonstatutory stock options to certain of our employees or officers. The 2005 Officers’ Stock Plan will terminate ten years after its adoption unless terminated earlier by our compensation committee. Stock options become vested and exercisable at such times and under such conditions as determined by our compensation committee on the date of grant. In November 2005, we issued a nonstatutory stock option to our CEO to purchase 120,000,000 shares of our Class B common stock under the 2005 Officers’ Stock Plan. As of September 30, 2012, the option had been partially exercised in respect of 60,000,000 shares with the remainder remaining outstanding and fully vested, and no options were available for future issuance under the 2005 Officers’ Stock Plan.

The following table summarizes the stock option and RSU award activity under the Stock Plans during the nine months ended September 30, 2012:



			Shares Subject to Options Outstanding							Outstanding RSUs
	Shares Available for Grant		Number of Shares		Weighted Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value⁽¹⁾		Outstanding RSUs		Weighted Average Grant Date Fair Value
	(in thousands)		(in thousands)				(in years)	(in millions)		(in thousands)
Balance as of December 31, 2011	52,318		258,539		$	0.47	4.38	$	7,360	378,772		$	6.83
RSUs granted	(33,865	)	—							33,865		34.69
Stock options exercised	—		(84,568	)	0.11					—
Stock options forfeited/cancelled	584		(584	)	0.62					—
RSUs forfeited and cancelled	9,089		—							(9,089	)	19.32
2012 Equity Incentive Plan shares authorized	25,000
Balance as of September 30, 2012	53,126		173,387		$	0.65	3.83	$	3,643	403,548		$	8.89


(1)	The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the assessed fair value of our common stock as of December 31, 2011 and the closing price of our common stock on September 30, 2012.

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Note 9.	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 (loss) before provision for income taxes. For example, the impact of non-deductible share based compensation expenses on our effective tax rate is significantly greater when our income (loss) before provision for income taxes is lower.

Our effective tax rate has exceeded the U.S. statutory rate primarily because of the impact of non-deductible share-based compensation and losses arising outside the United States in jurisdictions where we do not receive a tax benefit. These losses were primarily due to the initial start-up costs incurred by our foreign subsidiaries to operate in certain foreign markets, including the costs incurred by those subsidiaries to license, develop, and use our intellectual property. Our effective tax rate in the future will depend on the portion of our profits earned within and outside the United States, which will also be affected by our methodologies for valuing our intellectual property and intercompany transactions.

Our effective tax rate in the three months ended September 30, 2012 exceeded our effective tax rate in the three months ended September 30, 2011 because the impact of non-deductible share-based compensation and the losses arising outside the United States in jurisdictions where we do not receive a tax benefit are proportionately larger relative to income (loss) before provision for income taxes in 2012 than in 2011. Our effective tax rate in the three months ended September 30, 2012 was also higher due to the expiration of the federal tax credit for research and development activities.

Our effective tax rate in the nine months ended September 30, 2012 was zero. This occurred because the discrete tax items that arose during the nine months ended September 30, 2012 offset the tax benefit as determined based on an estimate of our annual effective tax rate as applied to our loss before provision for income taxes for the nine months ended September 30, 2012. Our effective tax rate in the nine months ended September 30, 2012 was lower than our effective tax rate in the nine months ended September 30, 2011 due to this effect.

Our income tax refundable was $567 million as of September 30, 2012, which reflects the expected refund of estimated income tax payments made in 2012 and the expected refund from income tax loss carrybacks to 2010 and 2011. Our net deferred tax assets were $399 million as of September 30, 2012, which is an increase of $339 million from December 31, 2011. This increase is primarily due to the recognition of tax benefits related to share-based compensation, offset by deferred tax liabilities established as part of our purchase accounting related to our acquisitions in the nine months ended September 30, 2012.

We are subject to taxation in the United States and various other state and foreign jurisdictions. The material jurisdictions in which we are subject to potential examination include the United States and Ireland. We are under examination by the Internal Revenue Service (IRS) for our 2008 and 2009 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 2010 and subsequent tax years remain subject to examination by the IRS and all tax years starting in 2008 remain subject to examination in Ireland. We remain subject to possible examinations or are undergoing audits in various other jurisdictions that are not material to our financial statements.

Although the timing of the resolution, settlement, and closure of any audits 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.

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Note 10.	Geographical Information

Revenue by geography is based on the billing address of the advertiser or Platform developer. The following tables set forth revenue and long-lived assets by geographic area (in millions):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Revenue:
United States	$	665	$	543	$	1,789	$	1,485
Rest of the world (1)	597		411		1,715		1,095
Total revenue	$	1,262	$	954	$	3,504	$	2,580


(1)	No individual country exceeded 10% of our total revenue for any period presented



	September 30, 2012		December 31, 2011
Long-lived assets:
United States	$	2,113	$	1,444
Rest of the world(1)	176		31
Total long-lived assets	$	2,289	$	1,475


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


Note 11.	Subsequent Events

In October 2012, we amended and restated our existing bridge credit facility, converting it into the Amended and Restated Term Loan, an unsecured term loan facility that allows us to borrow up to $1,500 million to fund tax withholding and remittance obligations related to the settlement of RSUs in connection with our IPO with interest payable on the borrowed amounts set at LIBOR plus 1.0%. We paid origination fees at closing of the Amended and Restated Term Loan, which fees are being amortized over the term of the facility. We are also obligated to pay an additional upfront fee of 0.15% of the aggregate amount of the borrowings requested on any applicable funding date, which would be amortized over the remaining term of the facility, as well as an annual commitment fee of 0.10% on the daily undrawn balance of the facility. We may make up to two borrowings under the Amended and Restated Term Loan prior to November 20, 2012. Any amounts outstanding under this facility will become due and payable upon the third anniversary date of the initial borrowing. As we previously disclosed in our Current Report on Form 8-K filed with the SEC on October 15, 2012, we currently expect to use borrowings under the Amended and Restated Term Loan to cover approximately half of the withholding tax liability that will arise when approximately 271 million RSUs vest and settle in October and November 2012, and that the average of the withholding tax rates will be approximately 45%.

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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 prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission on May 18, 2012 (Prospectus). 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.”

Overview

Our mission is to make the world more open and connected. Facebook enables you to express yourself and connect with the world around you instantly and freely.

We build products that support our mission by creating utility for users, developers, and advertisers:

Users. We enable people who use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them to the people they care about.

Developers. We enable developers to use the Facebook Platform to build applications (apps) and websites that integrate with Facebook to reach our global network of users and to build products that are more personalized, social, and engaging.

Advertisers. We enable advertisers to engage with more than one 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. We offer advertisers a unique combination of reach, relevance, social context, and engagement to enhance the value of their ads.

We generate substantially all of our revenue from advertising and from fees associated with our Payments infrastructure that enables users to purchase virtual and digital goods from our Platform developers. In the third quarter of 2012, we recorded revenue of $1,262 million, income from operations of $377 million and net loss of $59 million. In the first nine months of 2012, we recorded revenue of $3,504 million, income from operations of $15 million and net loss of $11 million. Total costs and expenses grew more than revenue, due to increased headcount and significant increases in share-based compensation and related payroll tax expenses for restricted stock units (RSUs) during the third quarter and the first nine months of 2012. During the third quarter and the first nine months of 2012, we recognized $148 million and $1,510 million, respectively, of share-based compensation and related payroll tax expenses. Of these amounts, $1,098 million was due to the recognition of share-based compensation and related payroll tax expenses related to RSUs granted prior to January 1, 2011 (Pre-2011 RSUs) triggered by the completion of our initial public offering (IPO) in May 2012. For the third quarter of 2012, we incurred a net loss despite generating income before provision for income taxes due to our effective tax rate exceeding 100%. Our effective tax rate has exceeded the U.S. statutory rate primarily due to the impact of non-deductible share-based compensation and losses arising outside the United States in jurisdictions where we do not receive a tax benefit.

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Trends in Our User Metrics

•

Monthly Active Users (MAUs). We define a monthly active user as a registered Facebook user who logged in and visited Facebook through our website or a mobile device, or took an action to share content or activity with his or her Facebook friends or connections via a third-party website that is integrated with Facebook, in the last 30 days as of the date of measurement. MAUs are a measure of the size of our global active user community, which has grown substantially in the past several years.

Note: For purposes of reporting MAUs, DAUs, 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 Africa, Latin America, and the Middle East. In 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 first quarter of 2012. While this issue did not affect our overall worldwide MAU number, it did affect our attribution of users to different geographic regions. The first quarter of 2012 user metrics reflect the reclassification to more correctly attribute users by geographic region.

As of September 30, 2012, we had 1.01 billion MAUs, an increase of 26% from September 30, 2011. Users in Brazil, India, and Japan represented key sources of growth in the third quarter of 2012 relative to the prior year. We had 61 million MAUs in Brazil as of September 30, 2012, an increase of 109% compared to the same period in 2011; we had 65 million MAUs in India as of September 30, 2012, an increase of 62% compared to the same period in 2011; and we had 18 million MAUs in Japan as of September 30, 2012, an increase of 218% compared to the same period in 2011. Additionally, we had 171 million MAUs in the United States as of September 30, 2012, an increase of 8% compared to the same period in 2011.

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•

Daily Active Users (DAUs). We define a daily active user as a registered Facebook user who logged in and visited Facebook through our website or a mobile device, or took an action to share content or activity with his or her Facebook friends or connections via a third-party website that is integrated with Facebook, on a given day. We view DAUs, and DAUs as a percentage of MAUs, as measures of user engagement.

Note: For non-worldwide DAU user numbers presented for the periods marked March 31, 2012 and June 30, 2012, the figures represent an average of the first 25 days of the period and the last 27 days of the period, respectively, in order to avoid using data subject to the algorithm error described in the MAU section above. These average numbers do not meaningfully differ from the average numbers when calculated over a full month.

Worldwide DAUs increased 28% to 584 million on average during September 2012 from 457 million during September 2011. We experienced growth in DAUs across major markets including Brazil, India and Japan. Overall growth in DAUs was driven largely by increased mobile usage of Facebook. Relative to June 30, 2012, DAUs increased from 552 million to 584 million, primarily due to an increase in mobile users. During the third quarter of 2012, the number of DAUs using personal computers increased modestly compared to the second quarter of 2012, but in certain key markets such as the United States and Europe the number of DAUs using personal computers was essentially flat quarter-over-quarter after having decreased modestly during the second quarter of 2012.

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•	Mobile MAUs. We define a mobile MAU as a user who accessed Facebook via a mobile app or via mobile-optimized versions of our website such as m.facebook.com, whether on a mobile phone or tablet such as the iPad, during the period of measurement.

Worldwide mobile MAUs increased by 61% from 376 million as of September 30, 2011 to 604 million as of September 30, 2012. In all regions, an increasing number of our MAUs are accessing Facebook through mobile devices, with users in India, Brazil and the United States representing key sources of mobile growth over this period. Approximately 126 million mobile MAUs accessed Facebook solely through mobile apps or our mobile website during the month ended September 30, 2012, increasing 24% from 102 million during the month ended June 30, 2012. The remaining 478 million mobile MAUs accessed Facebook from both personal computers and mobile devices during that month. While most of our mobile users also access Facebook through personal computers, we anticipate that the rate of growth in mobile usage will exceed the growth in usage through personal computers for the foreseeable future and that the usage through personal computers may be flat or continue to decline in certain markets, including key developed markets such as the United States, in part due to our focus on developing mobile products to encourage mobile usage of Facebook.

The number of MAUs, DAUs and mobile MAUs discussed above do not include Instagram users unless such users would otherwise qualify as MAUs, DAUs and mobile MAUs, respectively, based on activity that is shared back to Facebook.

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Trends in Our Monetization by User Geography

We calculate our revenue by user geography based on our estimate of the geography in which ad impressions are delivered or virtual goods are purchased. We define average revenue per user (ARPU) as our total revenue in a given geography during a given period, divided by the average of the number of MAUs in the geography at the beginning and end of the period. Our revenue and ARPU in markets such as the 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 advertisers and users.

Note: Our revenue by user geography in the charts above is geographically apportioned based on our estimation of the geographic location of our users when they perform a revenue-generating activity. This allocation differs from our revenue by geography disclosure in our consolidated financial statements where revenue is geographically apportioned based on the location of the advertiser or developer. In 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 first quarter of 2012. The first quarter of 2012 ARPU amount for the United States & Canada region reflects an adjustment based on the reclassification to more correctly attribute users by geographic region.

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During the third quarter of 2012, worldwide ARPU was $1.29, an increase of 4% from the third quarter of 2011. Over this period, ARPU increased by approximately 20% in the United States and Canada and Rest of World, and by 4% and 2% in Asia and Europe, respectively. ARPU in Europe declined compared to the second quarter of 2012 due primarily to a decline in Payments and other fees revenue and Advertising revenue being flat due, we believe, to seasonality traditionally experienced in the third quarter. User growth was more rapid in geographies with relatively lower ARPU, such as Asia and Rest of World. We expect that user growth in the future will continue to be higher in those regions where ARPU is relatively lower, such as Asia and Rest of World, such that worldwide ARPU may continue to increase at a slower rate relative to ARPU in any geographic region, or potentially decrease even if ARPU increases in each geographic region.

Limitations of Key Metrics

The numbers of our MAUs and DAUs and ARPU 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, despite our efforts to detect and suppress such behavior. We estimate, for example, that “duplicate” accounts (an account that a user maintains in addition to his or her principal account) may have represented approximately 4.8% of our worldwide MAUs as of June 30, 2012. We also seek to identify “false” accounts, which we divide into two categories: (1) user-misclassified accounts, where users have created personal profiles for a business, organization, or non-human entity such as a pet (such entities are permitted on Facebook using a Page rather than a personal profile under our terms of service); and (2) undesirable accounts, which represent user profiles that we determine are intended to be used for purposes that violate our terms of service, such as spamming. As of June 30, 2012, for example, we estimate user-misclassified accounts may have represented approximately 2.4% of our worldwide MAUs and undesirable accounts may have represented approximately 1.5% of our worldwide MAUs. We believe the percentage of accounts that are duplicate or false is meaningfully lower in developed markets such as the United States or Australia and higher in developing markets such as Indonesia and Turkey. However, these estimates are based on an internal review of a limited sample of accounts and we apply significant judgment in making this determination, such as identifying names that appear to be fake or other behavior that appears inauthentic to the reviewers. As such, our estimation of duplicate or false accounts may not accurately represent the actual number of such accounts. We are continually seeking to improve our ability to identify duplicate or false accounts and estimate the total number of such accounts, and such estimates may be affected by improvements or changes in our methodology.

Our metrics are also affected by applications on certain mobile devices that automatically contact our servers for regular updates with no user action involved, and this activity can cause our system to count the user associated with such a device as an active user on the day such contact occurs. For example, we estimate that less than 5% of our estimated worldwide DAUs as of December 31, 2011 and 2010 resulted from this type of automatic mobile activity, and that this type of activity had a substantially smaller effect on our estimate of worldwide MAUs and mobile MAUs. The impact of this automatic activity on our metrics varies by geography because mobile usage varies in different regions of the world. In addition, our data regarding the geographic location of our users is estimated based on a number of factors, such as the user’s IP address and self-disclosed location. These factors may not always accurately reflect the user’s actual location. For example, a mobile-only user may appear to be accessing Facebook from the location of the proxy server that the user connects to rather than from the user’s actual location. The methodologies used to measure user metrics may also be susceptible to algorithm or other technical errors. For example, in early June 2012, we discovered an error in the algorithm we used to estimate the geographic location of our users that affected our attribution of certain user locations for the period ended March 31, 2012. While this issue did not affect our overall worldwide MAU number, it did affect our attribution of users to different geographic regions. We estimate that the number of MAUs as of March 31, 2012 for the United States and Canada region was overstated as a result of the error by approximately 3% and these overstatements were offset by understatements in other regions. In addition, our estimates for revenue by user location are also affected by these factors. We regularly review and may adjust our processes for calculating these metrics to improve their accuracy. In addition, our MAU and DAU 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.

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Components of Results of Operations

Revenue

Advertising. Our advertising revenue is generated by displaying ad products on the Facebook website or mobile app and third-party affiliated websites. Advertisers pay for ad products which include Sponsored Stories in News Feed, either directly or through their relationships with advertising agencies, based on the number of impressions delivered or the number of clicks made by our users. We recognize revenue from the delivery of click-based ads or Sponsored Stories in the period in which a user clicks on the content. We recognize revenue from the display of impression-based ads or Sponsored Stories in the contracted period in which the impressions are delivered. Impressions are considered delivered when an ad or Sponsored Story is displayed to users. An individual Sponsored Story in News Feed that is purchased on an impression basis may be displayed to users more than once during a day; however, in general, only the initial display of the Sponsored Story is considered an impression, regardless of how many times the ad is actually displayed within the News Feed.

Payments and other fees. We enable Payments from our users to our Platform developers. Our users can transact and make payments on the Facebook Platform by using credit cards, PayPal or other payment methods available on our website. We receive a fee from our Platform developers when users make purchases from our Platform developers using our Payments infrastructure. We recognize revenue net of amounts remitted to our Platform developers. We have mandated the use of our Payments infrastructure for game apps on Facebook, and fees related to Payments are generated almost exclusively from games. Cumulatively to date, games from Zynga have generated the majority of our payments and other fees revenue. However, Zynga's contribution to our payments and other fees revenue has decreased over time and this trend may continue. Our other fees revenue has been immaterial in recent periods.

Cost of Revenue and Operating Expenses

Cost of revenue. Our cost of revenue consists primarily of expenses associated with the delivery and distribution of our products. These include expenses related to the operation of our data centers such as facility and server equipment depreciation, facility and server equipment rent expense, energy and bandwidth costs, support and maintenance costs, and salaries, benefits, and share-based compensation for employees on our operations teams. Cost of revenue also includes credit card and other transaction fees related to processing customer transactions.

Research and development. Research and development expenses consist primarily of salaries, benefits, and share-based compensation for employees on our engineering and technical teams who are responsible for building new products as well as improving existing products. We expense all of our research and development costs as they are incurred.

Marketing and sales. Our marketing and sales expenses consist primarily of salaries, benefits, and share-based compensation for our employees engaged in sales, sales support, marketing, business development, and customer service functions. Our marketing and sales expenses also include user-, developer-, and advertiser-facing marketing and promotional expenditures.

General and administrative. Our general and administrative expenses consist primarily of salaries, benefits, and share-based compensation for our executives as well as our legal, finance, human resources, corporate communications and policy, and other administrative employees. In addition, general and administrative expenses include outside consulting fees, legal and accounting services, and facilities and other supporting overhead costs. General and administrative expenses also include legal settlements.

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Results of Operations

The following table summarizes our historical condensed consolidated statements of operations data (in millions):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011		2012			2011
Revenue	$	1,262		$	954	$	3,504		$	2,580
Costs and expenses:
Cost of revenue	322			236		967			613
Research and development	244			108		1,102			264
Marketing and sales	168			114		703			272
General and administrative	151			82		717			222
Total costs and expenses	885			540		3,489			1,371
Income from operations	377			414		15			1,209
Net (loss) income	$	(59	)	$	227	$	(11	)	$	698
Share-based compensation expense included in costs and expenses:
Cost of revenue	8			3		79			6
Research and development	114			33		719			72
Marketing and sales	28			13		279			24
General and administrative	29			21		311			39
Total share-based compensation expense	$	179		$	70	$	1,388		$	141

The following table summarizes our historical condensed consolidated statements of operations data as a percentage of revenue for the periods shown:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Revenue	100	%	100	%	100	%	100	%
Costs and expenses:
Cost of revenue	26	%	25	%	28	%	24	%
Research and development	19	%	11	%	31	%	10	%
Marketing and sales	13	%	12	%	20	%	11	%
General and administrative	12	%	9	%	20	%	9	%
Total costs and expenses	70	%	57	%	100	%	53	%
Income from operations	30	%	43	%	—	%	47	%
Net (loss) income	(5	)%	24	%	—	%	27	%

Share-based compensation expense included in costs and expenses (as a percentage of revenue):



Cost of revenue	1	%	—	%	2	%	—	%
Research and development	9		3		21		3
Marketing and sales	2		1		8		1
General and administrative	2		2		9		2
Total share-based compensation expense	14	%	7	%	40	%	5	%

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Three and Nine Months Ended September 30, 2012 and 2011

Revenue



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012		2011		% change		2012		2011		% change
	(in millions, except for percentages)
Revenue:
Advertising	$	1,086	$	798	36	%	$	2,950	$	2,211	33	%
Payments and other fees	176		156		13	%	554		369		50	%
Total revenue	$	1,262	$	954	32	%	$	3,504	$	2,580	36	%

Revenue in the third quarter and the first nine months of 2012 increased $308 million, or 32%, and $924 million, or 36%, respectively, as compared to the same periods in 2011. The increase was due primarily to a 36% and 33% increase in advertising revenue during the third quarter and the first nine months of 2012, respectively, as compared to the same periods in 2011. In the third quarter and the first nine months of 2012, mobile advertising revenue as a percentage of adverting revenue was 14% and 6%, respectively. As mobile advertising was not offered prior to the first quarter of 2012, comparisons to prior year are not meaningful. Advertising revenue grew primarily due to a 27% increase in the number of ads delivered during both the third quarter and the first nine months of 2012 and to a lesser extent, due to a 7% and 5% increase in the average price per ad in those same periods.

The increase in ads delivered was driven primarily by user growth. MAUs grew 26% from September 30, 2011 to September 30, 2012 and average DAUs grew 28% from September 2011 to September 2012. Various product changes and changes in user engagement generally offset in their impact on the average number of ads per user. For example, the shift to greater mobile use generally reduced ads per user, while the introduction of Sponsored Stories in News Feed increased the number of ads per user. The rate of change in number of ads delivered also differs by geography, driven by factors such as mobile penetration. For example, Europe and Rest of World increased at a faster rate than the United States and Asia.

Growth in the average price per ad for the third quarter and the first nine months of 2012 compared to the same periods in 2011 was driven primarily by an increase in price per ad in the United States, which benefited from growth in Sponsored Stories in News Feed across desktop and mobile devices during the second and third quarters of 2012. Sponsored Stories in News Feed have a significantly higher average price per ad due to factors which include the prominent position of the Sponsored Stories. The increase in price per ad in the United States was partially offset by an increased percentage of our worldwide ads being delivered in the Asia and Rest of World geographies where the average price per ad, while growing on a year-over-year basis, is relatively lower. The average price per ad was also affected by a decline in the average price per ad in Europe in the third quarter and the first nine months of 2012 compared to the same periods in 2011 due to the impact of foreign exchange rate changes and, in part, we believe, to continuing weak economic conditions in that region affecting advertiser demand.

Payments and other fees revenue in the third quarter and the first nine months of 2012 increased to $176 million, or 13%, and $554 million, or 50%, respectively, as compared to the same periods in 2011. Payments revenue declined compared to the second quarter of 2012, we believe due primarily to users migrating from better monetizing simulation game-types towards lower monetizing arcade and puzzle game-types, as well as a shift in gaming activity to mobile devices which do not use our Payments product. Facebook Payments became mandatory for all game developers accepting payments on the Facebook Platform with limited exceptions on July 1, 2011. Accordingly, comparisons of Payments and other fees revenue to periods before this date may not be meaningful. Our Payments terms and conditions provide for a 30-day claim period subsequent to a Payments transaction during which the customer may dispute the virtual or digital goods transaction. To date, we have deferred recognition of Payments revenue until the expiration of this period as we were unable to make reasonable and reliable estimates of future refunds or chargebacks arising during this claim period, due to lack of historical transactional information. In the fourth quarter of 2012, we will have 24 months of historical transactional information which we currently anticipate will enable us to estimate future refunds and chargebacks. Accordingly, in the fourth quarter of 2012 we expect to record all Payments revenues at the time of the purchase of the related virtual or digital goods, net of estimated refunds or chargebacks. We anticipate that this change will result in a one-time increase in Payments revenue in the fourth quarter.

Seven percent and nine percent of our total revenue for the third quarter and the first nine months of 2012, respectively, and 12% of our total revenue for both the third quarter and the first nine months of 2011, came from a single customer, Zynga. Revenue from Zynga consisted of payments processing fees related to their sale of virtual goods and from direct advertising purchased by Zynga.

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Cost of revenue



	Three Months Ended September 30,								Nine Months Ended September 30,
	2012			2011			% change		2012			2011			% change
	(in millions, except for percentages)
Cost of revenue	$	322		$	236		36	%	$	967		$	613		58	%
Percentage of revenue	26		%	25		%			28		%	24		%

Cost of revenue in the third quarter of 2012 increased $86 million, or 36%, compared to the same period in 2011 and increased by $354 million, or 58%, in the first nine months of 2012 compared to the same period in 2011. The increases were primarily due to expenses related to expanding our data center operations, including $51 million and $172 million increases in depreciation in the third quarter and the first nine months of 2012, respectively. Share-based compensation expense increased by $73 million in the first nine months of 2012 compared to the same period in 2011 mainly due to recognition of expense related to Pre-2011 RSUs triggered by the completion of our IPO in May 2012 and, to a lesser extent, RSUs granted on or after January 1, 2011 (Post-2011 RSUs). Increases in payroll and benefits expenses resulting from a 53% increase in employee headcount also contributed to increases in cost of revenue during the periods presented. These expenses supported our user growth, the increased usage of our products by users, developers, and advertisers, and the launch of new products.

Research and development



	Three Months Ended September 30,								Nine Months Ended September 30,
	2012			2011			% change		2012			2011			% change
	(in millions, except for percentages)
Research and development	$	244		$	108		126	%	$	1,102		$	264		317	%
Percentage of revenue	19		%	11		%			31		%	10		%

Research and development expenses in the third quarter and the first nine months of 2012 increased $136 million and $838 million, respectively, compared to the same periods in 2011. The increases were primarily due to increased share-based compensation expense of $81 million and $647 million in the third quarter and the first nine months of 2012, respectively, resulting primarily from recognition of expense related to Post-2011 RSUs for the third quarter of 2012 and Pre-2011 RSUs for the first nine months of 2012. Payroll and benefits expense also increased due to a 77% growth in employee headcount in engineering, design, product management, and other technical functions. This investment supported our efforts to improve existing products and build new products for users, developers, and advertisers.

Marketing and sales



	Three Months Ended September 30,							Nine Months Ended September 30,
	2012			2011			% change	2012			2011			% change
	(in millions, except for percentages)
Marketing and sales	$	168		$	114		47%	$	703		$	272		158%
Percentage of revenue	13		%	12		%		20		%	11		%

Marketing and sales expenses in the third quarter and the first nine months of 2012 increased $54 million and $431 million, respectively, compared to the same periods in 2011. The increase in the third quarter of 2012 compared to the same period in 2011 was primarily due to an increase in payroll and benefits expenses resulting from a 21% increase in employee headcount to support global sales, business development, and customer service, including a $15 million increase in share-based compensation expense. The increase in the first nine months of 2012 compared to the same period in 2011 was primarily due to $255 million increase in share-based compensation expense resulting from recognition of expense related to Pre-2011 RSUs triggered by the completion of our IPO in May 2012 and, to a lesser extent, Post-2011 RSUs. An increase in our user-, developer-, and advertiser-facing marketing expense also affected both periods presented.

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General and administrative



	Three Months Ended September 30,								Nine Months Ended September 30,
	2012			2011			% change		2012			2011			% change
	(in millions, except for percentages)
General and administrative	$	151		$	82		84	%	$	717		$	222		223	%
Percentage of revenue	12		%	9		%			20		%	9		%

General and administrative expenses in the third quarter and the first nine months of 2012 increased $69 million and $495 million, respectively, compared to the same periods in 2011. The increase in the third quarter of 2012 compared to the same period in 2011 was primarily due to growth in legal fees, amortization of acquired patents and other professional services fees. The increase in the first nine months of 2012 was primarily due to increased share-based compensation expense of $272 million in the first nine months of 2012 resulting from recognition of expense related to Pre-2011 RSUs and, to a lesser extent, Post-2011 RSUs. Payroll and benefits expenses also increased for both periods presented due to a 49% increase in employee headcount in corporate communications and policy, human resources, legal, finance, and other functions.

Interest and other income (expense), net



	Three Months Ended September 30,								Nine Months Ended September 30,
	2012			2011			% change		2012			2011			% change
	(in millions, except for percentages)
Interest expense	$	(11	)	$	(10	)	10	%	$	(35	)	$	(26	)	35	%
Other income (expense), net	6			(25		)	124	%	9			(7		)	229	%
Total interest and other income (expense), net	$	(5	)	$	(35	)	(86	)%	$	(26	)	$	(33	)	(21	)%

Interest expense increased by $1 million and $9 million in the third quarter and the first nine months of 2012, respectively, compared to the same periods in 2011 primarily due to an increased volume of property and equipment financed by capital leases. Changes in other income (expense), net for the third quarter and the first nine months of 2012 compared to the same periods in 2011 were mostly due to lower foreign exchange losses in 2012 resulting from the periodic re-measurement of our foreign currency balances and to a lesser extent, an increase in interest income driven by larger invested cash balances.

Income Tax Provision



	Three Months Ended September 30,								Nine Months Ended September 30,
	2012			2011			% change		2012			2011			% change
	(in millions, except for percentages)
Provision for income taxes	$	431		$	152		184	%	$	—		$	478		(100	)%
Effective tax rate	116		%	40		%			—		%	41		%

Our provision for income taxes in the third quarter of 2012 increased by $279 million compared to the same period in 2011. The increase was primarily due to the impact of non-deductible share-based compensation and the geographic mix of our income. Our provision for income taxes in the first nine months of 2012 decreased by $478 million compared to the same period in 2011 primarily due to the loss before provision for income taxes.

Our effective tax rate in the third quarter of 2012 increased compared to the same period in 2011 primarily due to the impact of certain non-deductible share-based compensation expense that was recognized during the period and additional losses arising outside the United States in jurisdictions where we do not receive a tax benefit, and the expiration of the federal tax credit for research and development activities. The impact of these items on our effective tax rate is significantly greater when our income before provision for income taxes is lower.

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Our effective tax rate in the first nine months of 2012 was zero because the discrete tax items that arose during the first nine months of 2012 offset the income tax benefit that was based on applying our estimated annual effective tax rate to our loss before provision for income taxes. Our effective tax rate in the first nine months of 2012 was lower than our effective tax rate in the same period of 2011 due to this effect.

Our effective tax rate in the fourth quarter and full year of 2012 could exceed 100% depending on the amount and geographic mix of our income before provision for income taxes. If our effective tax rate exceeds 100%, we would have a net loss even though our income before provision for income taxes was positive for any period in which that occurs. If the federal tax credit for research and development activities is reinstated during the fourth quarter, our effective tax rate for the fourth quarter and full year of 2012 will be lower.

Liquidity and Capital Resources

Our principal sources of liquidity are our cash and cash equivalents, marketable securities, and cash generated from operations. Cash and cash equivalents and marketable securities consist primarily of cash on deposit with banks and investments in money market funds and U.S. government and U.S. government agency securities. Cash and cash equivalents and marketable securities totaled $10.5 billion as of September 30, 2012, an increase of $6.5 billion from December 31, 2011. The most significant cash flow activities consisted of $6.8 billion of net proceeds from our IPO which was completed in May 2012, $931 million of cash generated from operations and $854 million in excess tax benefit from share-based award activity, offset by $1.0 billion used for capital expenditures and $911 million used for acquisition of businesses and other assets. 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.

Pre-2011 RSUs vest upon the satisfaction of both a service condition and a liquidity condition. The liquidity condition will be satisfied in November 2012. Under settlement procedures applicable to these awards, we are permitted to deliver the underlying shares within 30 days before or after the date on which the liquidity condition is satisfied. We previously disclosed in our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 4, 2012 that we will vest and settle outstanding Pre-2011 RSUs for which the service condition has been satisfied and that are held by employees who were employed by us through October 15, 2012 on October 25, 2012 and such shares will be eligible for sale in the public markets as of market open on October 29, 2012. We will vest and settle outstanding Pre-2011 RSUs held by our non-employee directors and former employees on November 14, 2012.

On the settlement dates, we plan to withhold and remit income taxes for certain RSU holders at applicable minimum statutory rates based on the closing price of our common stock on the trading day immediately preceding the applicable settlement date. We currently expect that the average of these withholding tax rates will be approximately 45%. If the price of our common stock on the trading day immediately preceding the applicable settlement date were equal to $21.66, the closing price of our Class A common stock on September 30, 2012, we estimate that this tax obligation would be approximately $2.6 billion in the aggregate. The amount of this obligation could be higher or lower, depending on the closing price of our shares on the trading day immediately preceding the applicable settlement date. To settle these RSUs, assuming an approximate 45% tax withholding rate, we anticipate that we will net settle the awards on October 25, 2012 by delivering an aggregate of approximately 121 million shares of Class B common stock to RSU holders and withholding an aggregate of approximately 99 million shares of Class B common stock, based on RSUs outstanding as of September 30, 2012 for which the service condition will be satisfied as of October 15, 2012. In addition, we will also net settle on November 14, 2012 by delivering an aggregate of approximately 31 million shares of Class B common stock not held by then-current employees as of October 15, 2012 and withholding an aggregate of approximately 20 million shares of Class B common stock. In connection with these net settlements, we will withhold and remit the tax liabilities on behalf of the RSU holders in cash to the applicable tax authorities.

In February 2012, we entered into an agreement for an unsecured five-year revolving credit facility that allows us to borrow up to $5 billion for general corporate purposes, with interest payable on the borrowed amounts set at London Interbank Offered Rate (LIBOR) plus 1.0%. Under the terms of the new agreement, we are obligated to pay a commitment fee of 0.10% per annum on the daily undrawn balance.

Concurrent with our entering into the new revolving credit facility, we also entered into a bridge credit facility that allowed us to borrow up to $3 billion to fund tax withholding and remittance obligations related to the settlement of RSUs in connection

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with our IPO. No amounts were drawn down under these credit and bridge credit facility agreements as of September 30, 2012.

In October 2012, we amended and restated our existing bridge credit facility, converting it to an unsecured term loan facility (the Amended and Restated Term Loan) that allows us to borrow up to $1.5 billion to fund tax withholding and remittance obligations related to the settlement of RSUs in connection with our IPO, with interest payable on the borrowed amounts set at LIBOR plus 1.0%. We paid origination fees at closing of the Amended and Restated Term Loan, which fees are being amortized over the term of the facility. We are also obligated to pay an additional upfront fee of 0.15% of the aggregate amount of the borrowings requested on any applicable funding date, which would be amortized over the remaining term of the facility, as well as an annual commitment fee of 0.10% on the daily undrawn balance of the facility. We may make up to two borrowings under the Amended and Restated Term Loan prior to November 20, 2012. Any amounts outstanding under this facility will become due and payable upon the third anniversary date of the initial borrowing. As we previously disclosed in our Current Report on Form 8-K filed with the SEC on October 15, 2012, we currently expect to use borrowings under the Amended and Restated Term Loan to cover approximately half of the withholding tax liability that will arise when approximately 271 million RSUs vest and settle in October and November 2012, and that the average of the withholding tax rates will be approximately 45%.

As of September 30, 2012, $570 million of the $10.5 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.

Cash Provided by Operating Activities

Cash flow from operating activities during the first nine months of 2012 primarily consisted of adjustments to net income for certain non-cash items such as share-based compensation expense of $1.4 billion and total depreciation and amortization, partially offset by income tax refundable and deferred income taxes. The decrease in cash flow from operating activities during the first nine months of 2012 compared to the same period in 2011 was mainly due to $11 million of net loss incurred in 2012 compared to $698 million of net income generated in 2011, decreased deferred income taxes and increased income tax refundable, partially offset by increases in adjustments for non-cash items as described above.

Cash Used in Investing Activities

Cash used in investing activities during the first nine months of 2012 primarily resulted from $5.6 billion for the net purchase of marketable securities, $1.0 billion for capital expenditures related to the purchase of servers, networking equipment, storage infrastructure, and the construction of data centers as well as $911 million for acquisitions of businesses and other assets, such as patents. The increase in cash used in investing activities during the first nine months of 2012 compared to the same period in 2011 was mainly due to increases in the purchase of marketable securities, acquisitions of businesses and other assets and capital expenditures.

We anticipate making capital expenditures in 2012 of approximately $1.6 billion to $1.7 billion, a portion of which we will finance through leasing arrangements.

Cash Provided by Financing Activities

In May 2012, we received $6.8 billion in proceeds from our IPO, net of offering costs. Our financing activities have primarily consisted of equity issuances, lease financing, and debt financing. Net cash provided by financing activities was $7.6 billion and $1.1 billion, for the first nine months of 2012 and 2011, respectively, and included excess tax benefits from stock award activities of $854 million and $405 million for the same periods, respectively. In the first nine months of 2011, it also included $250 million of debt repayment. We had no outstanding debt during the same period in 2012.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of September 30, 2012.

Contractual Obligations

There were no material changes in our commitments under contractual obligations, as disclosed in our Prospectus.

Contingencies

We are involved in claims, lawsuits, government investigations, and proceedings. We record a provision for a liability when we believe both that it is probable that a liability has been incurred, and that the amount can be reasonably estimated. Significant

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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 7 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.

Recently Issued and Adopted Accounting Pronouncements

Comprehensive Income

In May 2011, the Financial Accounting Standards Board issued guidance that changed the requirement for presenting “Comprehensive Income” in the consolidated financial statements. The update requires an entity to present the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. We adopted this new guidance on January 1, 2012.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

We believe that the assumptions and estimates associated with revenue recognition for payments and other fees, income taxes and share-based compensation have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

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 Prospectus.

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Item 3.	Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk, including changes to interest rates, foreign currency exchange rates and inflation.

Foreign Currency Exchange Risk

International revenue as a percentage of revenue was 47% and 43% for the third quarter of 2012 and 2011, respectively, and 49% and 42% for the first nine months of 2012 and 2011, respectively. 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 (loss) 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. We recognized foreign currency losses of $1 million, $27 million, $4 million and $13 million in the third quarter of 2012 and 2011 and the first nine months of 2012 and 2011, respectively. At this time we do not, 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 impact hedging activities would have on our results of operations.

Interest Rate Sensitivity

Our cash and cash equivalents and marketable securities consist of cash, certificates of deposit, time deposits, money market funds and U.S. government treasury and agency debt securities. Our investment policy and strategy are focused on preservation of capital and supporting our liquidity requirements.

Changes in U.S. interest rates affect the interest earned on our cash and cash equivalents and marketable securities and the market value of those securities. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately $57 million and $15 million in the market value of our available-for-sale debt securities as of September 30, 2012 and December 31, 2011, respectively. Any realized gains or losses resulting from such interest rate changes would only occur if we sold the investments prior to maturity.


Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

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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 June 2, 2011, we filed a motion for expedited discovery based on evidence we submitted to the court showing that the alleged contract and emails upon which Mr. Ceglia bases his complaint are fraudulent. On July 1, 2011, the court granted our motion and ordered Mr. Ceglia to produce, among other things, all hard copy and electronic versions of the purported contract and emails. On January 10, 2012, the court granted our request for sanctions against Mr. Ceglia for his delay in compliance with that order. On March 26, 2012, we filed a motion to dismiss Mr. Ceglia’s complaint and a motion for judgment on the pleadings. We continue to believe that Mr. Ceglia is attempting to perpetrate a fraud on the court and we intend to continue to defend the case vigorously.

We are also currently parties to multiple other lawsuits related to our products, including patent infringement lawsuits brought by both other companies and non-practicing entities as well as class action lawsuits brought by users and advertisers, and we may in the future be subject to additional lawsuits and disputes. We are also involved in other claims, government investigations, and proceedings arising from the ordinary course of our business. Although the results of these other lawsuits, claims, government investigations, and proceedings in which we are involved cannot be predicted with certainty, we do not believe that the final outcome of these other matters will have a material adverse effect on our business, financial condition, or results of operations.

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Item 1A.	Risk Factors

Certain factors may have a material adverse effect on our business, financial condition and results of operations. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the trading price of our Class A common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business and Industry

If we fail to retain existing users or add new users, or if our users decrease their level of engagement with Facebook, our revenue, financial results, and business may be significantly harmed.

The size of our user base and our users’ level of engagement are critical to our success. We had 1.01 billion monthly active users (MAUs) as of September 30, 2012. Our financial performance has been and will continue to be significantly determined by our success in adding, retaining, and engaging active users. We anticipate that our active user growth rate will decline over time as the size of our active user base increases, and as we achieve higher market penetration rates. To the extent our active user growth rate slows, our business performance will become increasingly dependent on our ability to increase levels of user engagement and monetization in current and new markets. 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. A decrease in user retention, growth, or engagement could render Facebook less attractive to developers and advertisers, which may have a material and adverse impact on our revenue, business, financial condition, and results of operations. Any number of factors could potentially negatively affect user retention, growth, and engagement, including if:


•	users increasingly engage with competing products;


•	we fail to introduce new and improved products or if we introduce new products or services that are not favorably received;


•	we are unable to successfully balance our efforts to provide a compelling user experience with the decisions we make with respect to the frequency, prominence, and size of ads and other commercial content that we display;


•	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;


•	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;


•	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;


•	we fail to provide adequate customer service to users, developers, or advertisers;


•	we, our Platform developers, 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 the Facebook Platform, reduce user activity on Facebook by making it easier for our users to interact and share on third-party websites.

If we are unable to maintain and increase our user base and user engagement, our revenue, financial results, and future growth potential may be adversely affected.

We generate a substantial majority of our revenue from advertising. The loss of advertisers, or reduction in spending by advertisers with Facebook, could seriously harm our business.

The substantial majority of our revenue is currently generated from third parties advertising on Facebook. In the first nine

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months of 2012 and 2011 and the full 2011, 2010, and 2009 years, advertising accounted for 84%, 86%, 85%, 95% and 98%, respectively, of our revenue. As is common in the industry, our advertisers typically do not have long-term advertising commitments with us. Many of our advertisers spend only a relatively small portion of their overall advertising budget with us. In addition, advertisers may view some of our products, such as Sponsored Stories and ads with social context, as experimental and unproven. Advertisers will not continue to do business with us, or they will reduce the prices they are willing to pay to advertise with us, if we do not deliver ads and other commercial content 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;


•	increased user access to and engagement with Facebook through our mobile products, where we have generated only a small portion of our revenue, particularly to the extent that mobile engagement is substituted for engagement with Facebook on personal computers where we currently have demonstrated greater ability to scale monetization by displaying ads and other commercial content;


•	product changes or inventory management decisions we may make that reduce the size, frequency, or relative prominence of ads and other commercial content displayed on Facebook;


•	our inability to increase the pricing and quality of ads and other commercial content shown to users, particularly on mobile devices;


•	our inability to improve our analytics and measurement solutions that demonstrate the value of our ads and other commercial content;


•	decisions by advertisers to use our free products, such as Facebook Pages, instead of advertising on Facebook;


•	loss of advertising market share to our competitors;


•	adverse legal developments relating to advertising, including legislative and regulatory developments and developments in litigation;


•	adverse media reports or other negative publicity involving us, our Platform developers, or other companies in our industry;


•	our inability to create new products that sustain or increase the value of our ads and other commercial content;


•	the degree to which users opt out of social ads or otherwise limit the potential audience of commercial content;