Basic Guide Ramping Up On A Company With Public Information Part Two

We published part one last week which can be seen here and we are using Facebook as an example as it is well known to almost everyone.

See Part 1 Here

Now that we know the story well, lets go ahead and build the financial model. To do this lets review the latest earnings print (8-k) to see what information we are working with on a quarterly basis. Before we begin, this is a technology stock so you see they give both GAAP and Non-GAAP numbers, generally speaking for technology you use Non-GAAP numbers because tech stocks have quite a bit of stock based compensation (SBC) expense. The 8-K currently does not breakdown revenue by segment within the IS but does give a slight breakout in the comments.

http://www.sec.gov/Archives/edgar/data/1326801/000119312513192397/d5303…

Q1 2013 Highlights: With the basics out of the way, notice how the items we want to track are also disclosed on the 8-K (see Part 1). Daily active users (DAUs) were 665 million, Monthly Active Users (MAUs) were 1.11 billion; Mobile MAUs were 751 million. In addition the Company does give some breakout of revenue in the Q1 highlights (although exact numbers are not disclosed to the decimal point on the IS. Revenue from advertising was $1.25 billion, representing 85% of total revenue; Mobile advertising revenue represented approximately 30% of advertising revenue; Payments and other fees revenue was $213 million for the first quarter of 2013

In addition, note the other highlights in the most recent quarter: 1) Launched Facebook Home; 2) Instagram reached 100 million 3) Launched new advertising products such as Lookalike Audiences, Managed Custom Audiences, and Partner Categories 4) Partnered with Datalogix, Epsilon, Acxiom, and BlueKai 5) Enhanced ability to measure advertiser ROI through acquisition of Atlas Advertising Suite; 6) Appointed Susan D. Desmond-Hellmann, M.D., M.P.H., (UCSF), to the company’s board of directors.

Revenue: With the basic first quarter out of the way go ahead and build out your three statement model (yes this will take some time), generally at least 5 years of data should be a good starting point. Now you can break out the revenue line item.

1) Notice Q4 has higher revenue followed by a dip in Q1 (seasonality, IE: Q4 generally has a higher net contribution to annual revenue than Q1, Q2 or Q3)
2) Continue to build out the geographic break out (not from the 8-K however disclosed in 10-q filings so you can track regional ARPU numbers and other metrics, page 19 and 24). http://www.sec.gov/Archives/edgar/data/1326801/000132680113000011/fb-33…
3) While your financial model will simply have a revenue line, continue to track the 10-Q and 10-k filings and you will see that they disclose advertising and payment revenue (page 27).
4) Now break out the numbers we were told Mobile advertising was 30% of advertising revenue, we now know that Advertising revenue was $1.245 billion from the 10-Q so you can break out mobile versus desktop/notebook revenue by applying 30%*1.245B = $0.3735 billion in mobile advertising revenue $0.8715 billion in desktop/notebook

This is the basics, so now you have a general break out of revenue and have a top-line number to build out your financial model.

Expense: Read through the expense lines to understand how the items are being broken out starting with COGS which represents the operation of data centers, facility and server equipment, energy and bandwidth costs, support and maintenance costs, salaries, benefits, and SBC associated with such activities. This is followed by 1) R&D which is primarily salaries, benefits and SBC for employees in engineering; 2) Marketing and sales, sales support, marketing, business development, and customer service functions; 3) General and administrative salaries, benefits, and SBC for executives as well as legal, finance, human resources, corporate communications and others. Run the numbers as a percentage of sales for now and go through the 8-K to find guidance and long-term plans.

To wrap things up and make sure you have tied all the loose ends on the financial statements, go through the quarterly company slide deck (some companies do not have any) and build out the additional numbers as you see fit. Here’s the link to the deck.

http://files.shareholder.com/downloads/AMDA-NJ5DZ/2487389760x0x659143/b…

You now have an idea for the expense structure on a historical basis and it is now time to turn to building out the future quarterly earnings

Build Out The Model: Finally, now that you have a large set of historical numbers to review and also have information broken out by segment you can start to build out a forward model. The easiest way to get a proxy for forward estimates would be to review the analyst consensus numbers as of now. You can simply check yahoo finance for that.

http://finance.yahoo.com/q/ae?s=FB+Analyst+Estimates

To keep things simple set up a model that is in-line with consensus, then we can move on to part three where you come up with a differentiated approach. Attached is a more complicated financial model for Apple so you understand how to build a bottoms up model with a detailed breakout by revenue and even gross margins.

Updated Text

The Comparison example was a bit too complicated so we are leaving the finalized only. On June 30, 2013 we will load a basic guide to balancing and spot checking a three statement model. 1)Working Capital Checks, 2) change in non-cash charges and 3) adjustments to financing statement