Facebook Model Part III
by Brian BolanJuly 26, 2012 | Comments : 4 Recommended this article: (0)
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I have written two articles about modeling out Facebook. The first one walked your through the basics of how to build the model. The basics were mostly concerned with using the metrics to come to a revenue estimate. The second focused on how a few bulge bracket brokerages models look to give you a benchmark or a guideline. These ideas were again just speaking to the topline.
With the company reporting after the close tonight (7/26/12) I thought we should get the rest of the model up to speed to come up with an EPS estimate.
Where we left off
Right now, our model should have an income statement tab, a revenue tab and tabs for each of the four geographies that Facebook will report on. The next step is to add in the rest of the operating expenses and do some math and we should get an EPS estimate.
Go ahead and create tabs for Cost of Revenue, Marketing and Sales, R&D, G&A and Stock Based Compensation. Each expense line item needs its own tab to help give a clear view of how they relate to revenue. It also gives us the flexibility to add in data points that may be revealed on the call.
Cost of Revenue (COR) is a pretty simple one to address. What I do it take the Income statement that we have already built and copy and paste it into the COR tab. I have my historical numbers from the most recently field S-1 or maybe you could "borrow" them from another model. COR is basically the transaction costs that are charged to the company in the process of collecting the revenue. Most of the time they are related to credit card and processing fees.
I take the historical numbers and take a look at them as a percent of revenue. I do a simple equation for all three revenue line items (Advertising, Payments and Total). This gives me a trend of the percentage of revenue that COR has been. Next I will simply map out the sequential growth of COR. I will put the sequential growth of revenue directly under that to see how each move in tandem. Finally I will look at annual growth of COR and compare that to revenue.
At this point my COR tab will look like this:
I went ahead and modeled in a 350 number for COR for 2Q12. That gives me a 63% gross margin, a slight decrease from the previous quarter. It also works out to be the same sequential growth rate that the company experience in 2Q11. I see it slightly ticking up on an annual basis, and this sets the company up to make slight improvements in this number for the next several quarters.
The idea of being set up for the next several quarters is a very important one. The company is very young and this is the first public earnings release. It is important that the company beat expectations, but it is even more important that they can show steady progress throughout the remainder of the year. This is gets into some grey areas of accounting and managing revenue, expenses and earnings, but suffice it to say its important.
We should so the same thing for the other tabs. Data points are important things and you can add in head counts to look at efficiencies. Other data points can easily be added into any of the tabs down the road, but for now, lets just keep the model simple.
The Rest of the Expenses
The Marketing and Sales (M&S) tab can easily be structured in the same fashion. I do a simply copy and paste of the percentage equations as well as the growth equations. Be careful here as the rows have skipped down one line. That can change some of the equations so make sure to review each line. I have marketing at 210 million as we saw a boost from 1Q11 to 2Q11 of 51% sequential growth and I am looking for a more modest 32% growth. As a percentage of sales, M&S also increased over the same time period. M&S is a function of salaries, commissions and marketing costs.
Research & Development (R&D) is a pretty static number that is reflective of investment in the future operations of the company. As a growth company, we expect R&D to grow significantly over the next several years. The profitability of the company can really be managed in this line item more than others over the short term. Over the long term, this is where the profitability comes from. I have 195 million as a modest level of sales and a slight uptick from the previous quarter.
General & Administrative (G&A) is reflective of fixed costs of the business. Things like rent or utilities are the basis of this. Managerial salaries are also falling into this bucket, so this is where Mark Zuckerberg's 2013 salary of $1 gets dumped into. Other administrators salarys make up the bulk of this line item.
I did a Stock based compensation tab, but that is getting a little too advanced for the purpose of this and that line item get backed out of the EPS equation anyway. So let's skip that for now and if you need to get some clarity on that topic feel free to email me.
Tying it Together
I link all the estimates in each tab to the appropriate line item in the income statement and now I do some basic math. I subtract COR from Total revenue to get gross margin. I add all the expenses together and subtract that from gross margin to get my operating income.
Now I address to other line items that we have little control over. Interest Expense and Other. Interest expense is just what it sounds like but when the company has several billion dollars in cash it will likely turn into interest income. Therefore expense (as reported) is a negative number. Other refers to items where the company made money but not from its core segments of advertising or payments.
Taxes are next and this is very subjective right now. The company might guide to year end rates, but for now lets stick to a rate that is close to what they paid in the most recent quarter.
The rest is just adding and then dividing to come to an estimate.
One trick that I have found helpful is to make a tab for each quarter that compares the year ago number, the most recent quarter and your estimate to the actual. This way you have a reference point to see how your analysis skills have progressed. I also like to include the key metrics on that page as well to keep track of those estimates too. Before I enter in anything else I like to copy and paste special (values) to cut the cord if you will from the estimates to the quarterly page. This ensures that my estimates remain intact when I update my metric pages with the actual numbers.
You now have your frame work for building your own Facebook model and coming up with an educated guess on what the EPS will be. My estimate is calling for EPS of $0.10 which is one penny higher than the Zacks Consensus Estimate.
Feel free to comment below on what you think Facebook earnings will be for 2Q12!
Brian Bolan is a Stock Strategist for Zacks.com. He is also the Editor in charge of the Zacks Home Run Investor service
Brian is also the editor of Follow The Money Trader
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