(cid:2)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-K
__________________________
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
or
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
(State or other jurisdiction of incorporation or organization)
20-1665019
(I.R.S. Employer Identification Number)
1601 Willow Road, Menlo Park, California 94025
(Address of principal executive offices and Zip Code)
(650) 543-4800
(Registrant's telephone number, including area code)
__________________________
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, $0.000006 par value
(Title of each class)
The NASDAQ Stock Market LLC
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
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
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K.
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
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
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
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of June 30, 2015, the last business day of the registrant's
most recently completed second fiscal quarter, was $198 billion based upon the closing price reported for such date on the NASDAQ Global Select Market.
On January 25, 2016, the registrant had 2,294,939,865 shares of Class A common stock and 551,340,611 shares of Class B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 2016 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on
Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal
year ended December 31, 2015.
FACEBOOK, INC.
FORM 10-K
TABLE OF CONTENTS
Note About Forward-Looking Statements(cid:2)
Limitations of Key Metrics and Other Data(cid:2)
PART I
Item 1.(cid:2)
Business
Item 1A.(cid:2) Risk Factors
Item 1B.(cid:2) Unresolved Staff Comments(cid:2)
Item 2.(cid:2)
Properties
Item 3.(cid:2)
Legal Proceedings
Item 4.(cid:2) Mine Safety Disclosures
PART II
Item 5.(cid:2) Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities(cid:2)
Item 6.(cid:2)
Selected Financial Data
Item 7.(cid:2) Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.(cid:2) Quantitative and Qualitative Disclosures About Market Risk
Item 8.(cid:2)
Financial Statements and Supplementary Data
Item 9.(cid:2)
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.(cid:2) Controls and Procedures
Item 9B.(cid:2) Other Information
PART III
Item 10.(cid:2) Directors, Executive Officers and Corporate Governance
Item 11.(cid:2) Executive Compensation
Item 12.(cid:2) Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters(cid:2)
Item 13.(cid:2) Certain Relationships and Related Transactions, and Director Independence
Item 14.(cid:2) Principal Accounting Fees and Services
PART IV
Item 15.(cid:2) Exhibits, Financial Statement Schedules(cid:2)
Signatures
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NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. All statements contained in this Annual Report on Form 10-K 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 I, Item 1A, "Risk Factors"
in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or
implied in the forward-looking statements.
We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as
required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Unless expressly indicated or the context requires otherwise, the terms "Facebook," "company," "we," "us," and "our" in this
document refer to Facebook, Inc., a Delaware corporation, and, where appropriate, its wholly owned subsidiaries. The term "Facebook"
may also refer to our products, regardless of the manner in which they are accessed. For references to accessing Facebook on the "web"
or via a "website," such terms refer to accessing Facebook on personal computers. For references to accessing Facebook on "mobile,"
such term refers to accessing Facebook via a mobile application or via a mobile-optimized version of our website such as m.facebook.com,
whether on a mobile phone or tablet.
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LIMITATIONS OF KEY METRICS AND OTHER DATA
The numbers for our key metrics, which include our daily active users (DAUs), mobile DAUs, monthly active users (MAUs),
mobile MAUs, and average revenue per user (ARPU), as well as certain other metrics such as mobile-only DAUs and mobile-only MAUs,
are calculated using internal company data based on the activity of user accounts. While these numbers are based on what we believe to
be reasonable estimates of our user base for the applicable period of measurement, there are inherent challenges in measuring usage of
our products across large online and mobile populations around the world.
For example, there may be individuals who maintain one or more Facebook accounts in violation of our terms of service. We
estimate, for example, that "duplicate" accounts (an account that a user maintains in addition to his or her principal account) may have
represented less than 5% of our worldwide MAUs in 2015. We also seek to identify "false" accounts, which we divide into two categories:
(1) user-misclassified accounts, where users have created personal profiles for a business, organization, or non-human entity such as a
pet (such entities are permitted on Facebook using a Page rather than a personal profile under our terms of service); and (2) undesirable
accounts, which represent user profiles that we determine are intended to be used for purposes that violate our terms of service, such as
spamming. In 2015, for example, we estimate user-misclassified and undesirable accounts may have represented less than 2% of our
worldwide MAUs. We believe the percentage of accounts that are duplicate or false is meaningfully lower in developed markets such as
the United States or United Kingdom and higher in developing markets such as India and Turkey. However, these estimates are based on
an internal review of a limited sample of accounts and we apply significant judgment in making this determination, such as identifying
names that appear to be fake or other behavior that appears inauthentic to the reviewers. As such, our estimation of duplicate or false
accounts may not accurately represent the actual number of such accounts. We are continually seeking to improve our ability to identify
duplicate or false accounts and estimate the total number of such accounts, and such estimates may change due to improvements or
changes in our methodology.
Our data limitations may affect our understanding of certain details of our business. For example, while user-provided data
indicates a decline in usage among younger users, this age data is unreliable because a disproportionate number of our younger users
register with an inaccurate age. Accordingly, our understanding of usage by age group may not be complete.
Some of our metrics have also been affected by applications on certain mobile devices that automatically contact our servers for
regular updates with no user action involved, and this activity can cause our system to count the user associated with such a device as an
active user on the day such contact occurs. 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. Our estimates for revenue by user location and revenue by user device are also affected by these
factors. We regularly review our processes for calculating these metrics, and from time to time we may discover inaccuracies in our
metrics or make adjustments to improve their accuracy, including adjustments that may result in the recalculation of our historical metrics.
We believe that any such inaccuracies or adjustments are immaterial unless otherwise stated. In addition, our DAU and MAU estimates
will differ from estimates published by third parties due to differences in methodology. For example, some third parties are not able to
accurately measure mobile users or do not count mobile users for certain user groups or at all in their analyses.
The numbers of DAUs, mobile DAUs, MAUs, mobile MAUs, mobile-only DAUs and mobile-only MAUs discussed in this Annual
Report on Form 10-K, as well as ARPU, do not include users of Instagram or WhatsApp unless they would otherwise qualify as such
users, respectively, based on their other activities on Facebook. In addition, other user engagement metrics included herein do not include
Instagram or WhatsApp unless otherwise specifically stated.
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PART I
Item 1. Business
Overview
Our mission is to give people the power to share and make the world more open and connected.
Our top priority is to build useful and engaging products that enable people to connect and share through mobile devices and
personal computers. We also help people discover and learn about what is going on in the world around them, enable people to share
their opinions, ideas, photos and videos, and other activities with audiences ranging from their closest friends to the public at large,
and stay connected everywhere by accessing our products, including:
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Facebook. Facebook is a mobile application and website that enables people to connect, share, discover, and communicate
with each other on mobile devices and personal computers. We had 1.04 billion daily active users (DAUs) on average in
December 2015, an increase of 17% compared to December 2014. We had 934 million DAUs who accessed Facebook
from a mobile device on average in December 2015, an increase of 25% compared to December 2014. There are a number
of different ways to engage with people on Facebook, the most important of which is News Feed which displays an
algorithmically-ranked series of stories and advertisements individualized for each person.
Instagram. Instagram is a mobile application that enables people to take photos or videos, customize them with filter
effects, and share them with friends and followers in a photo feed or send them directly to friends.
• Messenger. Messenger is a messaging application available for mobile and web on a variety of platforms and devices.
Messenger enables people to reach others instantly and simply, and also enables businesses to engage with customers
seamlessly and securely.
• WhatsApp. WhatsApp Messenger is a fast, simple and reliable mobile messaging application that is used by people around
the world and is available on a variety of mobile platforms.
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Oculus. Our Oculus virtual reality technology and content platform power products that allow people to enter a completely
immersive and interactive environment to play games, consume content, and connect with others.
We generate substantially all of our revenue from selling advertising placements to marketers. Our ads let marketers reach
people based on a variety of factors including age, gender, location, interests, and behaviors. Marketers purchase ads that can appear
in multiple places including on Facebook, Instagram, and third-party applications and websites.
Competition
Our business is characterized by innovation, rapid change, and disruptive technologies. We face significant competition in
every aspect of our business, including from companies that provide tools to facilitate communications and the sharing of information,
companies that enable marketers to display advertising, and companies that provide development platforms for application
developers. We compete to attract, engage, and retain people who use our products, to attract and retain marketers, and to attract and
retain developers to build compelling mobile and web applications that integrate with our products.
We compete with the following:
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Companies that offer products that replicate the full range of capabilities we provide. For example, Google has integrated
social functionality into a number of its products, including search and Android, as well as other, largely regional, social
networks that have strong positions in particular countries.
Companies that develop applications, particularly mobile applications, that provide social or other communications
functionality, such as messaging, photo- and video-sharing, and micro-blogging.
Companies that provide web- and mobile-based information and entertainment products and services that are designed
to engage people and capture time spent on mobile devices and online.
Traditional, online, and mobile businesses that provide media for marketers to reach their audiences and/or develop tools
and systems for managing and optimizing advertising campaigns.
As we introduce or acquire new products, as our existing products evolve, or as other companies introduce new products and
services, we may become subject to additional competition.
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Technology
Our product development philosophy is centered on continuous innovation in creating and improving products that are social
by design, which means that our products are designed to place people and their social interactions at the core of the product experience.
As our user base grows, and the level of engagement from the people who use our products continues to increase, including on mobile
devices, our computing needs continue to expand. We make significant investments in technology both to improve our existing products
and services and to develop new ones, as well as for our marketers and developers.
We are also investing in a number of longer-term initiatives, such as connectivity efforts, artificial intelligence research, and
virtual reality, to develop technologies that we believe will help us better serve our communities and pursue our mission to make the
world more open and connected.
Our research and development expenses were $4.82 billion, $2.67 billion, and $1.42 billion in 2015, 2014, and 2013, respectively.
For information about our research and development expenses, see Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations—Results of Operations—Research and development" of this Annual Report on Form 10-K.
Sales and Operations
The majority of our marketers use our self-service ad platform to establish accounts and to launch and manage their advertising
campaigns. We also have a global sales force that is focused on attracting and retaining marketers and providing support to them
throughout the stages of the advertising campaign cycle from pre-purchase decision-making to real-time optimizations to post-
campaign analytics. We work directly with marketers, through traditional advertising agencies, and with an ecosystem of specialized
agencies and partners. We currently operate five support offices and more than 35 sales offices around the globe. We also invest in
and rely on self-service tools to provide direct customer support to our users and partners.
We own and lease data centers in various locations throughout the United States, and also own a data center facility in Sweden.
Marketing
To date, our communities have grown organically with people inviting their friends to connect with them, supported by internal
efforts to stimulate awareness and interest. In addition, we have invested and will continue to invest in marketing our products and
services to build our brand, grow our user base, and increase engagement around the world. We leverage the utility of our products
and our social distribution channels as our most effective marketing tools.
Intellectual Property
To establish and protect our proprietary rights, we rely on a combination of patents, patent applications, trademarks, copyrights,
trade secrets, including know-how, license agreements, confidentiality procedures, non-disclosure agreements with third parties,
employee disclosure and invention assignment agreements, and other contractual rights. In addition, to further protect our proprietary
rights, from time to time we have purchased patents and patent applications from third parties. We do not believe that our proprietary
technology is dependent on any single patent or copyright or groups of related patents or copyrights. We believe the duration of our
patents is adequate relative to the expected lives of our products.
Government Regulation
We are subject to a number of U.S. federal and state and foreign laws and regulations that affect companies conducting business
on the Internet. Many of these laws and regulations are still evolving and being tested in courts, and could be interpreted in ways that
could harm our business. These may involve user privacy and data protection, rights of publicity, content, intellectual property,
advertising, marketing, distribution, data security, data retention and deletion, personal information, electronic contracts and other
communications, competition, protection of minors, consumer protection, telecommunications, product liability, taxation, economic
or other trade prohibitions or sanctions, securities law compliance, and online payment services. In particular, we are subject to federal,
state, and foreign laws regarding privacy and protection of people's data. Foreign data protection, privacy, and other laws and regulations
can be more restrictive than those in the United States. U.S. federal and state and foreign laws and regulations, which in some cases
can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to significant change.
In addition, the application, interpretation, and enforcement of these laws and regulations are often uncertain, particularly in the new
and rapidly-evolving industry in which we operate, and may be interpreted and applied inconsistently from country to country and
inconsistently with our current policies and practices. There are also a number of legislative proposals pending before federal, state,
and foreign legislative and regulatory bodies, including a data protection regulation that is pending final approval by the European
legislature that may include operational requirements for companies that receive personal data that are different than those currently
in place in the European Union, and that will include significant penalties for non-compliance. In addition, some countries are
considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data
or similar requirements that could increase the cost and complexity of delivering our services.
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We are currently, and may in the future, be subject to regulatory orders or consent decrees. Violation of existing or future
regulatory orders or consent decrees could subject us to substantial monetary fines and other penalties that could negatively affect
our financial condition and results of operations.
Various laws and regulations in the United States and abroad, such as the U.S. Bank Secrecy Act, the Dodd-Frank Act, the USA
PATRIOT Act, and the Credit CARD Act, impose certain anti-money laundering requirements on companies that are financial
institutions or that provide financial products and services. Under these laws and regulations, financial institutions are broadly defined
to include money services businesses such as money transmitters, check cashers, and sellers or issuers of stored value or prepaid
access products. Requirements imposed on financial institutions under these laws include customer identification and verification
programs, record retention policies and procedures, and transaction reporting. To increase flexibility in how our use of Payments may
evolve and to mitigate regulatory uncertainty, we have received certain money transmitter licenses in the United States and are applying
for certain regulatory licenses in Europe, which will generally require us to demonstrate compliance with many domestic and foreign
laws relating to money transmission, gift cards and other prepaid access instruments, electronic funds transfers, anti-money laundering,
charitable fundraising, counter-terrorist financing, gambling, banking and lending, financial privacy and data security, and import and
export restrictions.
Employees
As of December 31, 2015, we had 12,691 employees.
Corporate Information
We were incorporated in Delaware in July 2004. We completed our initial public offering in May 2012 and our Class A common
stock is listed on The NASDAQ Global Select Market under the symbol "FB." Our principal executive offices are located at 1601
Willow Road, Menlo Park, California 94025, and our telephone number is (650) 543-4800.
Facebook, the Facebook logo, FB, the Like button, Instagram, Oculus, WhatsApp, and our other registered or common law
trademarks, service marks, or trade names appearing in this Annual Report on Form 10-K are the property of Facebook, Inc. or its
affiliates. Other trademarks, service marks, or trade names appearing in this Annual Report on Form 10-K are the property of their
respective owners.
Information about Segment and Geographic Revenue
Information about segment and geographic revenue is set forth in Notes 1 and 14 of our Notes to Consolidated Financial
Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Available Information
Our website address is www.facebook.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934,
as amended (Exchange Act), are filed with the U.S. Securities and Exchange Commission (SEC). We are subject to the informational
requirements of the Exchange Act and file or furnish reports, proxy statements, and other information with the SEC. Such reports and
other information filed by the Company with the SEC are available free of charge on our website at investor.fb.com when such reports
are available on the SEC's website. We use our investor.fb.com website and Mark Zuckerberg's Facebook Page (https://
www.facebook.com/zuck) as means of disclosing material non-public information and for complying with our disclosure obligations
under Regulation FD.
The public may read and copy any materials filed by Facebook with the SEC at the SEC's Public Reference Room at 100 F
Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC at www.sec.gov.
The contents of the websites referred to above are not incorporated into this filing. Further, our references to the URLs for
these websites are intended to be inactive textual references only.
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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 Annual Report on Form 10-
K, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the only
ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become
important factors that adversely affect our business. If any of the following risks actually occurs, our business, financial condition,
results of operations, and future prospects could be materially and adversely affected. In that event, the trading price of our Class A
common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business and Industry
If we fail to retain existing users or add new users, or if our users decrease their level of engagement with our products, our
revenue, financial results, and business may be significantly harmed.
The size of our user base and our users' level of engagement are critical to our success. Our financial performance has been
and will continue to be significantly determined by our success in adding, retaining, and engaging active users. We anticipate that our
active user growth rate will continue to decline over time as the size of our active user base increases, and as we achieve higher market
penetration rates. If people do not perceive our products to be useful, reliable, and trustworthy, we may not be able to attract or retain
users or otherwise maintain or increase the frequency and duration of their engagement. A number of other social networking companies
that achieved early popularity have since seen their active user bases or levels of engagement decline, in some cases precipitously.
There is no guarantee that we will not experience a similar erosion of our active user base or engagement levels. Our user engagement
patterns have changed over time, and user engagement can be difficult to measure, particularly as we introduce new and different
products and services. Any number of factors could potentially negatively affect user retention, growth, and engagement, including
if:
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users increasingly engage with other products or services;
we fail to introduce new products or services that users find engaging or if we introduce new products or services that
are not favorably received;
users feel that their experience is diminished as a result of the decisions we make with respect to the frequency, prominence,
format, size, and quality of ads that we display;
users have difficulty installing, updating, or otherwise accessing our products on mobile devices as a result of actions
by us or third parties that we rely on to distribute our products and deliver our services;
user behavior on any of our products changes, including decreases in the quality and frequency of content shared on our
products and services;
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 decreases 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;
we are unable to obtain or attract engaging third-party content;
users adopt new technologies where our products may be displaced in favor of other products or services, or may not
be featured or otherwise available;
there are adverse changes in our products that are mandated by legislation, regulatory authorities, or litigation, including
settlements or consent decrees;
technical or other problems prevent us from delivering our products in a rapid and reliable manner or otherwise affect
the user experience, such as security breaches or failure to prevent or limit spam or similar content;
we adopt terms, policies, or procedures related to areas such as sharing or user data that are perceived negatively by our
users or the general public;
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we elect to focus our user growth and engagement efforts more on longer-term initiatives, or if initiatives designed to
attract and retain users and engagement are unsuccessful or discontinued, whether as a result of actions by us, third
parties, or otherwise;
we fail to provide adequate customer service to users, marketers, or developers;
we, developers whose products are integrated with our products, or other companies in our industry are the subject of
adverse media reports or other negative publicity; or
our current or future products, such as our development tools and application programming interfaces that enable
developers to build, grow, and monetize mobile and web applications, reduce user activity on our products by making
it easier for our users to interact and share on third-party mobile and web applications.
If we are unable to maintain or increase our user base and user engagement, our revenue and financial results may be adversely
affected. Any decrease in user retention, growth, or engagement could render our products less attractive to users, marketers, and
developers, which is likely to have a material and adverse impact on our revenue, business, financial condition, and results of operations.
If our active user growth rate continues to slow, we will become increasingly dependent on our ability to maintain or increase levels
of user engagement and monetization in order to drive revenue growth.
We generate substantially all of our revenue from advertising. The loss of marketers, or reduction in spending by marketers, could
seriously harm our business.
Substantially all of our revenue is currently generated from third parties advertising on Facebook. For 2015, 2014, and 2013,
advertising accounted for 95%, 92% and 89%, respectively, of our revenue. In addition, we have recently introduced advertising on
Instagram. As is common in the industry, our marketers do not have long-term advertising commitments with us. Many of our marketers
spend only a relatively small portion of their overall advertising budget with us. We expect our ability to grow advertising revenue
will continue to be dependent on our ability to generate revenue from ads displayed on mobile devices. In addition, marketers may
view some of our products as experimental and unproven. Marketers will not continue to do business with us, or they will reduce the
prices they are willing to pay to advertise with us or the budgets they are willing to commit to us, if we do not deliver ads in an effective
manner, or if they do not believe that their investment in advertising with us will generate a competitive return relative to other
alternatives.
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Our advertising revenue could also be adversely affected by a number of other factors, including:
decreases in user engagement, including time spent on our products;
our inability to continue to increase user access to and engagement with our mobile products;
product changes or inventory management decisions we may make that change the size, format, frequency, or relative
prominence of ads displayed on our products or of other unpaid content shared by marketers on our products;
our inability to maintain or increase marketer demand, the pricing of our ads, or both;
our inability to maintain or increase the quantity or quality of ads shown to users;
changes to third-party policies that limit our ability to deliver or target advertising on mobile devices;
the availability, accuracy, and utility of analytics and measurement solutions offered by us or third parties that demonstrate
the value of our ads to marketers, or our ability to further improve such tools;
loss of advertising market share to our competitors, including if prices for purchasing ads on Facebook increase or if
competitors offer lower priced or more integrated products;
adverse legal developments relating to advertising, including legislative and regulatory developments and developments
in litigation;
decisions by marketers to reduce their advertising as a result of adverse media reports or other negative publicity involving
us, content on our products, developers with mobile and web applications that are integrated with our products, or other
companies in our industry;
the degree to which users opt out of certain types of ad targeting;
the degree to which users cease or reduce the number of times they click on our ads;
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changes in the way advertising on mobile devices or on personal computers is measured or priced; and
the impact of macroeconomic conditions, whether in the advertising industry in general, or among specific types of
marketers or within particular geographies.
The occurrence of any of these or other factors could result in a reduction in demand for our ads, which may reduce the prices
we receive for our ads, or cause marketers to stop advertising with us altogether, either of which would negatively affect our revenue
and financial results.
Our user growth, engagement, and monetization on mobile devices depend upon effective operation with mobile operating systems,
networks, and standards that we do not control.
There is no guarantee that popular mobile devices will continue to feature Facebook or our other products, or that mobile device
users will continue to use our products rather than competing products. We are dependent on the interoperability of Facebook and our
other products with popular mobile operating systems, networks, and standards that we do not control, such as the Android and iOS
operating systems. Any changes in such systems, or changes in our relationships with mobile operating system partners, handset
manufacturers, or mobile carriers, or in their terms of service or policies that degrade our products' functionality, reduce or eliminate
our ability to distribute our products, give preferential treatment to competitive products, limit our ability to deliver, target, or measure
the effectiveness of ads, or charge fees related to the distribution of our products or our delivery of ads could adversely affect the
usage of Facebook or our other products and monetization on mobile devices. Additionally, in order to deliver high quality mobile
products, it is important that our products work well with a range of mobile technologies, systems, networks, and standards that we
do not control, and that we have good relationships with handset manufacturers and mobile carriers. We may not be successful in
maintaining or developing relationships with key participants in the mobile industry or in developing products that operate effectively
with these technologies, systems, networks, or standards. In the event that it is more difficult for our users to access and use Facebook
or our other products on their mobile devices, or if our users choose not to access or use Facebook or our other products on their
mobile devices or use mobile products that do not offer access to Facebook or our other products, our user growth and user engagement
could be harmed. From time to time, we may also take actions regarding the distribution of our products or the operation of our
business based on what we believe to be in our long-term best interests. Such actions may adversely affect our users and our relationships
with the operators of mobile operating systems, handset manufacturers, mobile carriers, or other business partners, and there is no
assurance that these actions will result in the anticipated long-term benefits. In the event that our users are adversely affected by these
actions or if our relationships with such third parties deteriorate, our user growth, engagement, and monetization could be adversely
affected and our business could be harmed.
Our business is highly competitive. Competition presents an ongoing threat to the success of our business.
We face significant competition in every aspect of our business, including from companies that provide tools to facilitate
communication and the sharing of information, companies that enable marketers to display advertising and companies that provide
development platforms for applications developers. We compete with companies that offer products that replicate the full range of
capabilities we provide. For example, Google has integrated social functionality into a number of its products, including search and
Android, as well as other, largely regional, social networks that have strong positions in particular countries. We also compete with
companies that develop applications, particularly mobile applications, that provide social or other communications functionality, such
as messaging, photo- and video-sharing, and micro-blogging, and companies that provide web- and mobile-based information and
entertainment products and services that are designed to engage users and capture time spent on mobile devices and online. In addition,
we face competition from traditional, online, and mobile businesses that provide media for marketers to reach their audiences and/or
develop tools and systems for managing and optimizing advertising campaigns.
Some of our current and potential competitors may have significantly greater resources or better competitive positions in certain
product segments, geographic regions or user demographics than we do. These factors may allow our competitors to respond more
effectively than us to new or emerging technologies and changes in market conditions. We believe that some of our users, particularly
our younger users, are aware of and actively engaging with other products and services similar to, or as a substitute for, Facebook
products and services, and we believe that some of our users have reduced their engagement with Facebook in favor of increased
engagement with these other products and services. In the event that our users increasingly engage with other products and services,
we may experience a decline in user engagement in key user demographics or more broadly, in which case our business would likely
be harmed.
Our competitors may develop products, features, or services that are similar to ours or that achieve greater acceptance, may
undertake more far-reaching and successful product development efforts or marketing campaigns, or may adopt more aggressive
pricing policies. In addition, developers whose mobile and web applications are integrated with Facebook may use information shared
by our users through Facebook in order to develop products or features that compete with us. Certain competitors, including Google,
could use strong or dominant positions in one or more markets to gain competitive advantage against us in areas where we operate,
including: by integrating competing platforms, applications, or features into products they control such as mobile device operating
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systems, search engines, or web browsers; by making acquisitions; by limiting or denying our access to advertising measurement or
delivery systems; by limiting our ability to deliver, target, or measure the effectiveness of ads; by imposing fees or other charges
related to our delivery of ads; by making access to our products more difficult; or by making it more difficult to communicate with
our users. As a result, our competitors may acquire and engage users or generate advertising or other revenue at the expense of our
own efforts, which may negatively affect our business and financial results. In addition, from time to time, we may take actions in
response to competitive threats, but we cannot assure you that these actions will be successful or that they will not negatively affect
our business and financial results.
We believe that our ability to compete effectively depends upon many factors both within and beyond our control, including:
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the popularity, usefulness, ease of use, performance, and reliability of our products compared to our competitors' products,
particularly with respect to mobile products;
the size and composition of our user base;
the engagement of our users with our products and competing products;
the timing and market acceptance of products, including developments and enhancements to our or our competitors'
products;
our ability to distribute our products to new and existing users;
our ability to monetize our products;
the frequency, size, format, quality, and relative prominence of the ads displayed by us or our competitors;
customer service and support efforts;
marketing and selling efforts, including our ability to measure the effectiveness of our ads and to provide marketers with
a compelling return on their investments;
our ability to establish and maintain developers' interest in building mobile and web applications that integrate with
Facebook and our other products;
our ability to establish and maintain publisher interest in integrating their content with Facebook and our other products;
changes mandated by legislation, regulatory authorities, or litigation, including settlements and consent decrees, some
of which may have a disproportionate effect on us;
acquisitions or consolidation within our industry, which may result in more formidable competitors;
our ability to attract, retain, and motivate talented employees, particularly software engineers, designers, and product
managers;
our ability to cost-effectively manage and grow our operations; and
our reputation and brand strength relative to those of our competitors.
If we are not able to compete effectively, our user base and level of user engagement may decrease, we may become less
attractive to developers and marketers, and our revenue and results of operations may be materially and adversely affected.
Action by governments to restrict access to Facebook or our other products in their countries could substantially harm our business
and financial results.
It is possible that governments of one or more countries may seek to censor content available on Facebook or our other products
in their country, restrict access to our products from their country entirely, or impose other restrictions that may affect the accessibility
of our products in their country for an extended period of time or indefinitely. For example, access to Facebook has been or is currently
restricted in whole or in part in China, Iran, and North Korea. In addition, government authorities in other countries may seek to
restrict access to our products if they consider us to be in violation of their laws. In the event that content shown on Facebook or our
other products is subject to censorship, access to our products is restricted, in whole or in part, in one or more countries, or other
restrictions are imposed on our products, or our competitors are able to successfully penetrate new geographic markets or capture a
greater share of existing geographic markets that we cannot access or where we face other restrictions, our ability to retain or increase
our user base and user engagement may be adversely affected, we may not be able to maintain or grow our revenue as anticipated,
and our financial results could be adversely affected.
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Our new products and changes to existing products could fail to attract or retain users or generate revenue and profits.
Our ability to retain, increase, and engage our user base and to increase our revenue depends heavily on our ability to create
successful new products, both independently and in conjunction with developers or other third parties. We may introduce significant
changes to our existing products, or acquire or introduce new and unproven products, including using technologies with which we
have little or no prior development or operating experience. For example, in July 2014 we acquired Oculus VR, Inc. (Oculus), a
company developing virtual reality technology. We do not have prior experience with consumer hardware products or virtual reality
technology, which may adversely affect our ability to successfully develop and market Oculus' products or technology, and we will
incur increased costs in connection with the development and marketing of such products and technology. In addition, in October
2014, we acquired WhatsApp Inc. (WhatsApp), and we have also invested significant resources in growing Messenger. We have
historically monetized messaging in only a very limited fashion, and we may not be successful in our efforts to generate meaningful
revenue from messaging over the long term. If these or other new or enhanced products fail to engage users, marketers, or developers,
or if we are unsuccessful in our monetization efforts, we may fail to attract or retain users or to generate sufficient revenue, operating
margin, or other value to justify our investments, and our business may be adversely affected.
We make product and investment decisions that may not prioritize short-term financial results.
We frequently make product and investment decisions that may not prioritize short-term financial results if we believe that the
decisions are consistent with our mission and benefit the aggregate user experience and will thereby improve our financial performance
over the long term. For example, from time to time we may change the size, frequency, or relative prominence of ads in order to
improve ad quality and overall user experience. Similarly, from time to time we update our News Feed ranking algorithm to deliver
the most relevant content to our users, which may adversely affect the distribution of content of marketers and developers and could
reduce their incentive to invest in their development and marketing efforts on Facebook. We also may introduce changes to existing
products, or introduce new stand-alone products, that direct users away from properties where we have a proven means of monetization.
For example, we have taken action to redirect users who send messages from within the Facebook application to our stand-alone
Messenger application, although we do not monetize the stand-alone Messenger application in any significant manner. In addition,
we plan to continue focusing on growing the user base for WhatsApp and potentially other stand-alone applications that may have
limited or no near-term monetization, and it is possible that these efforts may reduce engagement with the core Facebook application.
We also may take steps that result in limiting distribution of mobile products and services in the short term in order to attempt to
ensure the availability of our products and services to users over the long term. These decisions may not produce the long-term benefits
that we expect, in which case our user growth and engagement, our relationships with marketers and developers, and our business
and results of operations could be harmed.
If we are not able to maintain and enhance our brands, or if events occur that damage our reputation and brands, our ability to
expand our base of users, marketers, and developers may be impaired, and our business and financial results may be harmed.
We believe that our brands have significantly contributed to the success of our business. We also believe that maintaining and
enhancing our brands is critical to expanding our base of users, marketers, and developers. Many of our new users are referred by
existing users. Maintaining and enhancing our brands will depend largely on our ability to continue to provide useful, reliable,
trustworthy, and innovative products, which we may not do successfully. We may introduce new products or terms of service or
policies that users do not like, which may negatively affect our brands. Additionally, the actions of our developers may affect our
brands if users do not have a positive experience using third-party mobile and web applications integrated with Facebook. We will
also continue to experience media, legislative, or regulatory scrutiny of our decisions regarding user privacy and other issues, which
may adversely affect our reputation and brands. We also may fail to provide adequate customer service, which could erode confidence
in our brands. Our brands may also be negatively affected by the actions of users that are deemed to be hostile or inappropriate to
other users, or by users acting under false or inauthentic identities, by perceived or actual efforts by governments to obtain access to
user information for security-related purposes, or by the use of our products or services for illicit, objectionable, or illegal ends.
Maintaining and enhancing our brands may require us to make substantial investments and these investments may not be successful.
Certain of our past actions have eroded confidence in our brands, and if we fail to successfully promote and maintain our brands or
if we incur excessive expenses in this effort, our business and financial results may be adversely affected.
Security breaches and improper access to or disclosure of our data or user data, or other hacking and phishing attacks on our
systems, could harm our reputation and adversely affect our business.
Our industry is prone to cyber attacks, with third parties seeking unauthorized access to our data or users’ data. Any failure to
prevent or mitigate security breaches and improper access to or disclosure of our data or user data could result in the loss or misuse
of such data, which could harm our business and reputation and diminish our competitive position. In addition, computer malware,
viruses, and hacking and phishing attacks by third parties have become more prevalent in our industry, have occurred on our systems
in the past, and may occur on our systems in the future. As a result of our prominence, we believe that we are a particularly attractive
target for such breaches and attacks. Such attacks may cause interruptions to the services we provide, degrade the user experience,
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cause users to lose confidence in our products, or result in financial harm to us. Our efforts to protect our company data or the
information we receive may also be unsuccessful due to software bugs or other technical malfunctions, employee error or malfeasance,
government surveillance, or other factors. In addition, third parties may attempt to fraudulently induce employees or users to disclose
information in order to gain access to our data or our users' data. Although we have developed systems and processes that are designed
to protect our data and user data and to prevent data loss and other security breaches, we cannot assure you that such measures will
provide absolute security.
In addition, some of our developers or other partners, such as those that help us measure the effectiveness of ads, may receive
or store information provided by us or by our users through mobile or web applications integrated with Facebook. We provide limited
information to such third parties based on the scope of services provided to us. However, if these third parties or developers fail to
adopt or adhere to adequate data security practices, or in the event of a breach of their networks, our data or our users' data may be
improperly accessed, used, or disclosed.
Affected users or government authorities could initiate legal or regulatory actions against us in connection with any security
breaches or improper disclosure of data, which could cause us to incur significant expense and liability or result in orders or consent
decrees forcing us to modify our business practices. Any of these events could have a material and adverse effect on our business,
reputation, or financial results.
Unfavorable media coverage could negatively affect our business.
We receive a high degree of media coverage around the world. Unfavorable publicity regarding, for example, our privacy
practices, terms of service, product changes, product quality, litigation or regulatory activity, government surveillance, the actions of
our developers whose products are integrated with our products, the use of our products or services for illicit, objectionable, or illegal
ends, the actions of our users, or the actions of other companies that provide similar services to us, could adversely affect our reputation.
Such negative publicity also could have an adverse effect on the size, engagement, and loyalty of our user base and result in decreased
revenue, which could adversely affect our business and financial results.
Our financial results will fluctuate from quarter to quarter and are difficult to predict.
Our quarterly financial results have fluctuated in the past and will fluctuate in the future. Additionally, we have a limited
operating history with the current scale of our business, which makes it difficult to forecast our future results. As a result, you should
not rely upon our past quarterly financial results as indicators of future performance. You should take into account the risks and
uncertainties frequently encountered by companies in rapidly evolving markets. Our financial results in any given quarter can be
influenced by numerous factors, many of which we are unable to predict or are outside of our control, including:
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our ability to maintain and grow our user base and user engagement;
our ability to attract and retain marketers in a particular period;
fluctuations in spending by our marketers due to seasonality, such as historically strong spending in the fourth quarter
of each year, or other factors;
the frequency, prominence, size, format, and quality of ads shown to users;
the pricing of our ads and other products;
our ability to maintain or increase Payments and other fees revenue;
the diversification and growth of revenue sources beyond advertising on Facebook;
the development and introduction of new products or services by us or our competitors;
increases in marketing, sales, and other operating expenses that we will incur to grow and expand our operations and to
remain competitive;
our ability to maintain gross margins and operating margins;
costs related to acquisitions, including costs associated with amortization and additional investments to develop the
acquired technologies;
charges associated with impairment of any assets on our balance sheet;
our ability to obtain equipment and components for our data centers and other technical infrastructure in a timely and
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cost-effective manner;
system failures or outages, which could prevent us from serving ads for any period of time;
breaches of security or privacy, and the costs associated with any such breaches and remediation;
changes in the manner in which we distribute our products or inaccessibility of our products due to third-party actions;
fees paid to third parties for content or the distribution of our products;
share-based compensation expense, including acquisition-related expense;
adverse litigation judgments, settlements, or other litigation-related costs;
changes in the legislative or regulatory environment, including with respect to privacy and data protection, or enforcement
by government regulators, including fines, orders, or consent decrees;
the overall tax rate for our business, which may be affected by a number of factors, including the financial results of our
international subsidiaries and the timing, size, and integration of acquisitions we may make from time to time;
tax obligations that may arise from changes in laws or resolutions of tax examinations that materially differ from the
amounts we have anticipated;
fluctuations in currency exchange rates and changes in the proportion of our revenue and expenses denominated in
foreign currencies;
fluctuations in the market values of our portfolio investments and in interest rates;
changes in U.S. generally accepted accounting principles; and
changes in global business or macroeconomic conditions.
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We expect our rates of growth to decline in the future.
We expect that our user growth and revenue growth rates will decline over time as the size of our active user base increases
and as we achieve greater market penetration. For example, the growth rate of our revenue declined from 58% from 2013 to 2014, to
44% from 2014 to 2015. We expect our revenue growth rate will generally decline over time as our revenue increases to higher levels.
As our growth rates decline, investors' perceptions of our business may be adversely affected and the trading price of our Class A
common stock could decline.
Our costs are continuing to grow, which could harm our business and profitability.
Operating our business is costly, and we expect our expenses to continue to increase in the future as we broaden our user base,
as users increase the amount of content they consume and the data they share with us, as we develop and implement new products,
and as we continue to hire additional employees to support our expanding operations. We expect to continue to invest in our global
connectivity efforts, which may not have a clear path to monetization. We may also be subject to increased costs in order to obtain
and attract third-party content or to facilitate the distribution of our products. In addition, we will incur increased costs in connection
with the development and marketing of our Oculus products. Any such investments may not be successful, and any such increases in
our costs may adversely affect our business and profitability.
Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, and
other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims,
changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or
otherwise harm our business.
We are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business,
including privacy and data protection, rights of publicity, content, intellectual property, advertising, marketing, distribution, data
security, data retention and deletion, personal information, electronic contracts and other communications, competition, protection of
minors, consumer protection, telecommunications, product liability, taxation, economic or other trade prohibitions or sanctions,
securities law compliance, and online payment services. The introduction of new products or expansion of our activities in certain
jurisdictions may subject us to additional laws and regulations. In addition, foreign data protection, privacy, and other laws and
regulations can be more restrictive than those in the United States.
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These U.S. federal and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition
to government entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation,
and enforcement of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we
operate, and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and
practices. For example, regulatory or legislative actions affecting the manner in which we display content to our users could adversely
affect user growth and engagement. Such actions could affect the manner in which we provide our services or adversely affect our
financial results.
We are also subject to laws and regulations that dictate whether, how, and under what circumstances we can transfer, process
and/or receive transnational data that is critical to our operations, including data relating to users, customers, or partners outside the
United States, and those laws and regulations are uncertain and subject to change. For example, in October 2015, the European Court
of Justice invalidated the European Commission's 2000 Safe Harbour Decision as a legitimate basis on which Facebook could rely
for the transfer of data from the European Union to the United States. In addition, the other bases on which Facebook relies are likely
to be subject to regulatory or judicial scrutiny. If Facebook is unable to transfer data between and among countries and regions in
which it operates, it could affect the manner in which we provide our services or adversely affect our financial results.
Proposed legislation and regulations could also significantly affect our business. There currently are a number of proposals
pending before federal, state, and foreign legislative and regulatory bodies, including a data protection regulation that is pending final
approval by the European legislature that may include operational requirements for companies that receive or process personal data
that are different than those currently in place in the European Union, and that will include significant penalties for non-compliance.
Similarly, there are a number of legislative proposals in the United States, at both the federal and state level, that could impose new
obligations in areas affecting our business, such as liability for copyright infringement by third parties. In addition, some countries
are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of
data or similar requirements that could increase the cost and complexity of delivering our services.
These existing and proposed laws and regulations, as well as any associated inquiries, investigations, or actions, can be costly
to comply with and can delay or impede the development of new products, result in negative publicity, increase our operating costs,
require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands
or orders that we modify or cease existing business practices.
We have been subject to regulatory investigations and settlements and we expect to continue to be subject to such proceedings and
other inquires in the future, which could cause us to incur substantial costs or require us to change our business practices in a
manner materially adverse to our business.
From time to time, we receive formal and informal inquiries from government authorities and regulators regarding our
compliance with laws and regulations, many of which are evolving and subject to interpretation. We are and expect to continue to be
the subject of investigations, inquiries, actions, and audits in the United States, Europe, and around the world, particularly in the areas
of consumer and data protection, as we continue to grow and expand our operations. For example, several data protection authorities
in Europe have initiated actions seeking to assert jurisdiction over Facebook Inc. and our subsidiaries and to restrict the ways in which
we collect and use information, and other data protection authorities may do the same. Orders issued by, or inquiries or enforcement
actions initiated by, government or regulatory authorities could cause us to incur substantial costs, expose us to unanticipated civil
and criminal liability or penalties (including substantial monetary fines), or require us to change our business practices in a manner
materially adverse to our business.
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If we are unable to protect our intellectual property, the value of our brands and other intangible assets may be diminished, and
our business may be adversely affected.
We rely and expect to continue to rely on a combination of confidentiality, assignment, and license agreements with our
employees, consultants, and third parties with whom we have relationships, as well as trademark, copyright, patent, trade secret, and
domain name protection laws, to protect our proprietary rights. In the United States and internationally, we have filed various
applications for protection of certain aspects of our intellectual property, and we currently hold a number of issued patents in multiple
jurisdictions and have acquired patents and patent applications from third parties. In addition, in the future we may acquire additional
patents or patent portfolios, which could require significant cash expenditures. Third parties may knowingly or unknowingly infringe
our proprietary rights, third parties may challenge proprietary rights held by us, and pending and future trademark and patent applications
may not be approved. In addition, effective intellectual property protection may not be available in every country in which we operate
or intend to operate our business. In any or all of these cases, we may be required to expend significant time and expense in order to
prevent infringement or to enforce our rights. Although we have generally taken measures to protect our proprietary rights, there can
be no assurance that others will not offer products or concepts that are substantially similar to ours and compete with our business.
In addition, we regularly contribute software source code under open source licenses and have made other technology we developed
available under other open licenses, and we include open source software in our products. For example, we have contributed certain
specifications and designs related to our data center equipment to the Open Compute Project Foundation, a non-profit entity that
shares and develops such information with the technology community, under the Open Web Foundation License. As a result of our
open source contributions and the use of open source in our products, we may license or be required to license or disclose code and/
or innovations that turn out to be material to our business and may also be exposed to increased litigation risk. If the protection of our
proprietary rights is inadequate to prevent unauthorized use or appropriation by third parties, the value of our brands and other intangible
assets may be diminished and competitors may be able to more effectively mimic our products, services, and methods of operations.
Any of these events could have an adverse effect on our business and financial results.
We are currently, and expect to be in the future, party to patent lawsuits and other intellectual property rights claims that are
expensive and time consuming, and, if resolved adversely, could have a significant impact on our business, financial condition,
or results of operations.
Companies in the Internet, technology, and media industries own large numbers of patents, copyrights, trademarks, and trade
secrets, and frequently enter into litigation based on allegations of infringement, misappropriation, or other violations of intellectual
property or other rights. In addition, various "non-practicing entities" that own patents and other intellectual property rights often
attempt to aggressively assert their rights in order to extract value from technology companies. Furthermore, from time to time we
may introduce or acquire new products, including in areas where we historically have not competed, which could increase our exposure
to patent and other intellectual property claims from competitors and non-practicing entities.
From time to time, we receive notice letters from patent holders alleging that certain of our products and services infringe their
patent rights. We presently are involved in a number of intellectual property lawsuits, and as we face increasing competition and gain
an increasingly high profile, we expect the number of patent and other intellectual property claims against us to grow. Defending
patent and other intellectual property litigation is costly and can impose a significant burden on management and employees, and
there can be no assurances that favorable final outcomes will be obtained in all cases. In addition, plaintiffs may seek, and we may
become subject to, preliminary or provisional rulings in the course of any such litigation, including potential preliminary injunctions
requiring us to cease some or all of our operations. We may decide to settle such lawsuits and disputes on terms that are unfavorable
to us. Similarly, if any litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that
may not be reversed upon appeal. The terms of such a settlement or judgment may require us to cease some or all of our operations
or pay substantial amounts to the other party. In addition, we may have to seek a license to continue practices found to be in violation
of a third party's rights, which may not be available on reasonable terms, or at all, and may significantly increase our operating costs
and expenses. As a result, we may also be required to develop alternative non-infringing technology or practices or discontinue the
practices. The development of alternative non-infringing technology or practices could require significant effort and expense or may
not be feasible. Our business, financial condition, and results of operations could be adversely affected as a result of an unfavorable
resolution of the disputes and litigation referred to above.
We are involved in numerous class action lawsuits and other litigation matters that are expensive and time consuming, and, if
resolved adversely, could harm our business, financial condition, or results of operations.
In addition to intellectual property claims, we are also involved in numerous other lawsuits, including putative class action
lawsuits, many of which claim statutory damages and/or seek significant changes to our business operations, and we anticipate that
we will continue to be a target for numerous lawsuits in the future. Because of the scale of our user base, the plaintiffs in class action
cases filed against us typically claim enormous monetary damages even if the alleged per-user harm is small or non-existent. In
addition, we may be subject to additional class action lawsuits based on product performance or other claims related to the use of
consumer hardware and software, as well as virtual reality technology and products, which are new and unproven. Any negative
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outcome from any such lawsuits could result in payments of substantial monetary damages or fines, or undesirable changes to our
products or business practices, and accordingly our business, financial condition, or results of operations could be materially and
adversely affected. Although the results of such lawsuits and claims cannot be predicted with certainty, we do not believe that the
final outcome of those matters relating to our products that we currently face will have a material adverse effect on our business,
financial condition, or results of operations. In addition, we are currently the subject of stockholder class action suits in connection
with our IPO. We believe these lawsuits are without merit and are vigorously defending these lawsuits.
There can be no assurances that a favorable final outcome will be obtained in all our cases, and defending any lawsuit is costly
and can impose a significant burden on management and employees. Any litigation to which we are a party may result in an onerous
or unfavorable judgment that may not be reversed upon appeal or in payments of substantial monetary damages or fines, or we may
decide to settle lawsuits on similarly unfavorable terms, which could adversely affect our business, financial conditions, or results of
operations.
We may incur liability as a result of information retrieved from or transmitted over the Internet or published using our products
or as a result of claims related to our products.
We have faced, currently face, and will continue to face claims relating to information that is published or made available on
our products. In particular, the nature of our business exposes us to claims related to defamation, intellectual property rights, rights
of publicity and privacy, and personal injury torts. This risk is enhanced in certain jurisdictions outside the United States where our
protection from liability for third-party actions may be unclear and where we may be less protected under local laws than we are in
the United States. We could incur significant costs investigating and defending such claims and, if we are found liable, significant
damages. If any of these events occur, our business and financial results could be adversely affected.
Our CEO has control over key decision making as a result of his control of a majority of our voting stock.
Mark Zuckerberg, our founder, Chairman, and CEO, is able to exercise voting rights with respect to a majority of the voting
power of our outstanding capital stock and therefore has the ability to control the outcome of matters submitted to our stockholders
for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. This
concentrated control could delay, defer, or prevent a change of control, merger, consolidation, or sale of all or substantially all of our
assets that our other stockholders support, or conversely this concentrated control could result in the consummation of such a transaction
that our other stockholders do not support. This concentrated control could also discourage a potential investor from acquiring our
Class A common stock due to the limited voting power of such stock relative to the Class B common stock and might harm the trading
price of our Class A common stock. In addition, Mr. Zuckerberg has the ability to control the management and major strategic
investments of our company as a result of his position as our CEO and his ability to control the election or replacement of our directors.
In the event of his death, the shares of our capital stock that Mr. Zuckerberg owns will be transferred to the persons or entities that he
has designated. As a board member and officer, Mr. Zuckerberg owes a fiduciary duty to our stockholders and must act in good faith
in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder,
Mr. Zuckerberg is entitled to vote his shares, and shares over which he has voting control as governed by a voting agreement, in his
own interests, which may not always be in the interests of our stockholders generally.
We plan to continue to make acquisitions, which could harm our financial condition or results of operations and may adversely
affect the price of our common stock.
As part of our business strategy, we have made and intend to continue to make acquisitions to add specialized employees and
complementary companies, products, or technologies. We may not be able to find suitable acquisition candidates, and we may not be
able to complete acquisitions on favorable terms, if at all. In some cases, the costs of such acquisitions may be substantial. For example,
in 2014 we paid approximately $4.6 billion in cash and issued 178 million shares of our Class A common stock in connection with
our acquisition of WhatsApp, and we paid approximately $400 million in cash and issued 23 million shares of our Class B common
stock in connection with our acquisition of Oculus. We also issued a substantial number of RSUs to help retain the employees of these
companies. There is no assurance that we will receive a favorable return on investment for these or other acquisitions.
In the future, we may pay substantial amounts of cash or incur debt to pay for acquisitions, which could adversely affect our
liquidity. The incurrence of indebtedness would also result in increased fixed obligations, increased interest expense, and could also
include covenants or other restrictions that would impede our ability to manage our operations. We may also issue equity securities
to pay for acquisitions and we regularly grant RSUs to retain the employees of acquired companies, which could increase our expenses,
adversely affect our financial results, and result in dilution to our stockholders. In addition, any acquisitions we announce could be
viewed negatively by users, marketers, developers, or investors, which may adversely affect our business or the price of our common
stock.
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We may also discover liabilities or deficiencies associated with the companies or assets we acquire that were not identified in
advance, which may result in significant unanticipated costs. The effectiveness of our due diligence review and our ability to evaluate
the results of such due diligence are dependent upon the accuracy and completeness of statements and disclosures made or actions
taken by the companies we acquire or their representatives, as well as the limited amount of time in which acquisitions are executed.
In addition, we may fail to accurately forecast the financial impact of an acquisition transaction, including tax and accounting charges.
Acquisitions may also result in our recording of significant additional expenses to our results of operations and recording of substantial
finite-lived intangible assets on our balance sheet upon closing. Any of these factors may adversely affect our financial condition or
results of operations.
We may not be able to successfully integrate our acquisitions, and we may incur significant costs to integrate and support the
companies we acquire.
The integration of acquisitions requires significant time and resources, and we may not manage these processes successfully.
Our ability to successfully integrate complex acquisitions is unproven, particularly with respect to companies that have significant
operations or that develop products where we do not have prior experience. For example, Oculus and WhatsApp are larger and more
complex than companies we have historically acquired. In particular, Oculus builds technology and products that are new to Facebook
and with which we did not have significant experience or structure in place to support prior to the acquisition. We are making substantial
investments of resources to support these acquisitions, which will result in significant ongoing operating expenses and may divert
resources and management attention from other areas of our business. We cannot assure you that these investments will be successful.
If we fail to successfully integrate the companies we acquire, we may not realize the benefits expected from the transaction and our
business may be harmed.
If our goodwill or finite-lived intangible assets become impaired, we may be required to record a significant charge to earnings.
We review our finite-lived intangible assets for impairment when events or changes in circumstances indicate the carrying
value may not be recoverable, such as a decline in stock price and market capitalization. We test goodwill for impairment at least
annually. If such goodwill or finite-lived intangible assets are deemed to be impaired, an impairment loss equal to the amount by
which the carrying amount exceeds the fair value of the assets would be recognized. We may be required to record a significant charge
in our financial statements during the period in which any impairment of our goodwill or finite-lived intangible assets is determined,
which would negatively affect our results of operations.
Our business is dependent on our ability to maintain and scale our technical infrastructure, and any significant disruption in our
service could damage our reputation, result in a potential loss of users and engagement, and adversely affect our financial results.
Our reputation and ability to attract, retain, and serve our users is dependent upon the reliable performance of our products and
our underlying technical infrastructure. Our systems may not be adequately designed with the necessary reliability and redundancy
to avoid performance delays or outages that could be harmful to our business. If our products are unavailable when users attempt to
access them, or if they do not load as quickly as expected, users may not use our products as often in the future, or at all, and our
ability to serve ads may be disrupted. As our user base and engagement continue to grow, and the amount and types of information
shared on Facebook and our other products continue to grow and evolve, such as increased engagement with video, we will need an
increasing amount of technical infrastructure, including network capacity and computing power, to continue to satisfy the needs of
our users. It is possible that we may fail to effectively scale and grow our technical infrastructure to accommodate these increased
demands. In addition, our business may be subject to interruptions, delays, or failures resulting from earthquakes, adverse weather
conditions, other natural disasters, power loss, terrorism, or other catastrophic events. If such an event were to occur, users may be
subject to service disruptions or outages and we may not be able to recover our technical infrastructure and user data in a timely
manner to restart or provide our services, which may adversely affect our financial results.
A substantial portion of our network infrastructure is provided by third parties. Any disruption or failure in the services we
receive from these providers could harm our ability to handle existing or increased traffic and could significantly harm our business.
Any financial or other difficulties these providers face may adversely affect our business, and we exercise little control over these
providers, which increases our vulnerability to problems with the services they provide.
We could experience unforeseen difficulties in building and operating key portions of our technical infrastructure.
We have designed and built our own data centers and key portions of our technical infrastructure through which we serve our
products, and we plan to continue to significantly expand the size of our infrastructure primarily through data centers and other projects.
The infrastructure expansion we are undertaking is complex, and unanticipated delays in the completion of these projects or availability
of components may lead to increased project costs, operational inefficiencies, or interruptions in the delivery or degradation of the
quality of our products. In addition, there may be issues related to this infrastructure that are not identified during the testing phases
of design and implementation, which may only become evident after we have started to fully utilize the underlying equipment, that
could further degrade the user experience or increase our costs.
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Our products and internal systems rely on software that is highly technical, and if it contains undetected errors or vulnerabilities,
our business could be adversely affected.
Our products and internal systems rely on software, including software developed or maintained internally and/or by third
parties, that is highly technical and complex. In addition, our products and internal systems depend on the ability of such software to
store, retrieve, process, and manage immense amounts of data. The software on which we rely has contained, and may now or in the
future contain, undetected errors, bugs, or vulnerabilities. Some errors may only be discovered after the code has been released for
external or internal use. Errors, vulnerabilities, or other design defects within the software on which we rely may result in a negative
experience for users and marketers who use our products, delay product introductions or enhancements, result in measurement or
billing errors, compromise our ability to protect the data of our users and/or our intellectual property or lead to reductions in our ability
to provide some or all of our services. For example, social games on Facebook rely on Adobe Flash, which games are currently
responsible for substantially all of our Payments revenue. In July 2015, certain vulnerabilities discovered in Flash led to temporary
interruption of support for Flash by popular web browsers. If similar interruptions occur in the future and disrupt our ability to provide
social games to some or all of our users, our ability to generate Payments revenue would be harmed. Any errors, bugs, vulnerabilities,
or defects discovered in the software on which we rely, and any associated degradations or interruptions of service, could result in
damage to our reputation, loss of users, loss of revenue, or liability for damages, any of which could adversely affect our business
and financial results.
Technologies have been developed that can block the display of our ads, which could adversely affect our financial results.
Technologies have been developed, and will likely continue to be developed, that can block the display of our ads, particularly
advertising displayed on personal computers. We generate substantially all of our revenue from advertising, including revenue resulting
from the display of ads on personal computers. Revenue generated from the display of ads on personal computers has been impacted
by these technologies from time to time. As a result, these technologies have had an adverse effect on our financial results and, if such
technologies continue to proliferate, in particular with respect to mobile platforms, our future financial results may be harmed.
Certain of our user metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics
may harm our reputation and negatively affect our business.
The numbers for our key metrics, which include our DAUs, mobile DAUs, MAUs, mobile MAUs, and average revenue per
user (ARPU), as well as certain other metrics such as mobile-only DAUs and mobile-only MAUs, are calculated using internal
company data based on the activity of user accounts. While these numbers are based on what we believe to be reasonable estimates
of our user base for the applicable period of measurement, there are inherent challenges in measuring usage of our products across
large online and mobile populations around the world.
For example, there may be individuals who maintain one or more Facebook accounts in violation of our terms of service. We
estimate, for example, that "duplicate" accounts (an account that a user maintains in addition to his or her principal account) may have
represented less than 5% of our worldwide MAUs in 2015. We also seek to identify "false" accounts, which we divide into two
categories: (1) user-misclassified accounts, where users have created personal profiles for a business, organization, or non-human
entity such as a pet (such entities are permitted on Facebook using a Page rather than a personal profile under our terms of service);
and (2) undesirable accounts, which represent user profiles that we determine are intended to be used for purposes that violate our
terms of service, such as spamming. In 2015, for example, we estimate that such user-misclassified and undesirable accounts may
have represented less than 2% our worldwide MAUs. We believe the percentage of accounts that are duplicate or false is meaningfully
lower in developed markets such as the United States or United Kingdom and higher in developing markets such as India and Turkey.
However, these estimates are based on an internal review of a limited sample of accounts and we apply significant judgment in making
this determination, such as identifying names that appear to be fake or other behavior that appears inauthentic to the reviewers. As
such, our estimation of duplicate or false accounts may not accurately represent the actual number of such accounts. We are continually
seeking to improve our ability to identify duplicate or false accounts and estimate the total number of such accounts, and such estimates
may change due to improvements or changes in our methodology.
Our data limitations may affect our understanding of certain details of our business. For example, while user-provided data
indicates a decline in usage among younger users, this age data is unreliable because a disproportionate number of our younger users
register with an inaccurate age. Accordingly, our understanding of usage by age group may not be complete.
Some of our metrics have also been affected by applications on certain mobile devices that automatically contact our servers
for regular updates with no user action involved, and this activity can cause our system to count the user associated with such a device
as an active user on the day such contact occurs. The impact of this automatic activity on our metrics varied 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
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susceptible to algorithm or other technical errors. Our estimates for revenue by user location and revenue by user device are also
affected by these factors. We regularly review our processes for calculating these metrics, and from time to time we may discover
inaccuracies in our metrics or make adjustments to improve their accuracy, including adjustments that may result in the recalculation
of our historical metrics. We believe that any such inaccuracies or adjustments are immaterial unless otherwise stated. In addition,
our DAU and MAU estimates will differ from estimates published by third parties due to differences in methodology. For example,
some third parties are not able to accurately measure mobile users or do not count mobile users for certain user groups or at all in
their analyses.
If marketers, developers, or investors do not perceive our user metrics to be accurate representations of our user base, or if we
discover material inaccuracies in our user metrics, our reputation may be harmed and marketers and developers may be less willing
to allocate their budgets or resources to Facebook, which could negatively affect our business and financial results.
We cannot assure you that we will effectively manage our growth.
Our employee headcount and the scope and complexity of our business have increased significantly, with the number of
employees increasing to 12,691 as of December 31, 2015 from 9,199 as of December 31, 2014, and we expect headcount growth to
continue for the foreseeable future. The growth and expansion of our business and products create significant challenges for our
management, operational, and financial resources, including managing multiple relations with users, marketers, developers, and other
third parties. In the event of continued growth of our operations or in the number of our third-party relationships, our information
technology systems or our internal controls and procedures may not be adequate to support our operations. In addition, some members
of our management do not have significant experience managing a large global business operation, so our management may not be
able to manage such growth effectively. To effectively manage our growth, we must continue to improve our operational, financial,
and management processes and systems and to effectively expand, train, and manage our employee base. As our organization continues
to grow, and we are required to implement more complex organizational management structures, we may find it increasingly difficult
to maintain the benefits of our corporate culture, including our ability to quickly develop and launch new and innovative products.
This could negatively affect our business performance.
The loss of one or more of our key personnel, or our failure to attract and retain other highly qualified personnel in the future,
could harm our business.
We currently depend on the continued services and performance of our key personnel, including Mark Zuckerberg and Sheryl
K. Sandberg. Although we have entered into employment agreements with Mr. Zuckerberg and Ms. Sandberg, the agreements have
no specific duration and constitute at-will employment. In addition, many of our key technologies and systems are custom-made for
our business by our personnel. The loss of key personnel, including members of management as well as key engineering, product
development, marketing, and sales personnel, could disrupt our operations and have an adverse effect on our business.
As we continue to grow, we cannot guarantee we will continue to attract the personnel we need to maintain our competitive
position. In particular, we intend to continue to hire a significant number of technical personnel in the foreseeable future, and we
expect to face significant competition from other companies in hiring such personnel, particularly in the San Francisco Bay Area,
where our headquarters are located and where the cost of living is high. As we mature, the incentives to attract, retain, and motivate
employees provided by our equity awards or by future arrangements may not be as effective as in the past, and if we issue significant
equity to attract additional employees, the ownership of our existing stockholders may be further diluted. Our ability to attract, retain,
and motivate employees may also be adversely affected by stock price volatility. Additionally, we have a number of current employees
whose equity ownership in our company has provided them a substantial amount of personal wealth, which could affect their decisions
about whether or not to continue to work for us. As a result of these factors, it may be difficult for us to continue to retain and motivate
our employees. If we do not succeed in attracting, hiring, and integrating excellent personnel, or retaining and motivating existing
personnel, we may be unable to grow effectively.
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We may not be able to continue to successfully grow usage of and engagement with mobile and web applications that integrate
with Facebook and our other products.
We have made and are continuing to make investments to enable developers to build, grow, and monetize mobile and web
applications that integrate with Facebook and our other products. Such existing and prospective developers may not be successful in
building, growing, or monetizing mobile and/or web applications that create and maintain user engagement. Additionally, developers
may choose to build on other platforms, including mobile platforms controlled by third parties, rather than building products that
integrate with Facebook and our other products. We are continuously seeking to balance the distribution objectives of our developers
with our desire to provide an optimal user experience, and we may not be successful in achieving a balance that continues to attract
and retain such developers. For example, from time to time, we have taken actions to reduce the volume of communications from
these developers to users on Facebook and our other products with the objective of enhancing the user experience, and such actions
have reduced distribution from, user engagement with, and our monetization opportunities from, mobile and web applications integrated
with our products. In some instances, these actions, as well as other actions to enforce our policies applicable to developers, have
adversely affected our relationships with such developers. If we are not successful in our efforts to continue to grow the number of
developers that choose to build products that integrate with Facebook and our other products or if we are unable to continue to build
and maintain good relations with such developers, our user growth and user engagement and our financial results may be adversely
affected.
We currently generate all of our Payments revenue from developers that use Facebook on personal computers, and we expect that
our Payments revenue will continue to decline in the future as usage of Facebook on personal computers continues to decline.
We currently generate all of our Payments revenue from developers that use Facebook on personal computers. Specifically,
applications built by developers of social games are currently responsible for substantially all of our revenue derived from Payments,
and the majority of the revenue from these applications has historically been generated by a limited number of the most popular games.
We have experienced and expect to see the continued decline in usage of Facebook on personal computers for the foreseeable future,
which we expect will result in a continuing decline in Payments revenue. In addition, a relatively small percentage of our users have
transacted with Facebook Payments. If the Facebook-integrated applications fail to grow or maintain their users and engagement,
whether as a result of the continued decline in the usage of Facebook on personal computers or otherwise, if developers do not continue
to introduce new applications that attract users and create engagement on Facebook, or if Facebook-integrated applications outside
of social games do not gain popularity and generate significant revenue for us, our financial performance could be adversely affected.
Payment transactions may subject us to additional regulatory requirements and other risks that could be costly and difficult to
comply with or that could harm our business.
Our users can purchase virtual and digital goods from developers that offer applications using our Payments infrastructure on
the Facebook website. In addition, certain of our users can use our Payments infrastructure for other activities, such as sending money
to other users and making donations to certain charitable organizations. We are subject to a variety of laws and regulations in the
United States, Europe, and elsewhere, including those governing anti-money laundering and counter-terrorist financing, money
transmission, gift cards and other prepaid access instruments, electronic funds transfer, charitable fundraising, and import and export
restrictions. Depending on how our Payments product evolves, we may also be subject to other laws and regulations including those
governing gambling, banking, and lending. In some jurisdictions, the application or interpretation of these laws and regulations is not
clear. To increase flexibility in how our use of Payments may evolve and to mitigate regulatory uncertainty, we have received certain
money transmitter licenses in the United States and are applying for certain regulatory licenses in Europe, which will generally require
us to demonstrate compliance with many domestic and foreign laws in these areas. Our efforts to comply with these laws and regulations
could be costly and result in diversion of management time and effort and may still not guarantee compliance. In the event that we
are found to be in violation of any such legal or regulatory requirements, we may be subject to monetary fines or other penalties such
as a cease and desist order, or we may be required to make product changes, any of which could have an adverse effect on our business
and financial results.
In addition, we may be subject to a variety of additional risks as a result of Payments transactions, including:
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increased costs and diversion of management time and effort and other resources to deal with bad transactions or customer
disputes;
potential fraudulent or otherwise illegal activity by users, developers, employees, or third parties;
restrictions on the investment of consumer funds used to transact Payments; and
additional disclosure and reporting requirements.
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We have significant international operations and plan to continue expanding our operations abroad where we have limited operating
experience, and this may subject us to increased business and economic risks that could affect our financial results.
We have significant international operations and plan to continue the international expansion of our business operations and
the translation of our products. We currently make Facebook available in more than 90 different languages, and we have offices or
data centers in more than 30 different countries. We may enter new international markets where we have limited or no experience in
marketing, selling, and deploying our products. Our products are generally available globally through the web and on mobile, but
some or all of our products or functionality may not be available in certain markets due to legal and regulatory complexities. For
example, Facebook is not generally available in China. We also outsource certain operational functions to third-party vendors globally.
If we fail to deploy, manage, or oversee our international operations successfully, our business may suffer. In addition, we are subject
to a variety of risks inherent in doing business internationally, including:
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political, social, or economic instability;
risks related to the legal and regulatory environment in foreign jurisdictions, including with respect to privacy, tax, law
enforcement, content, trade compliance, intellectual property, and terrestrial infrastructure matters;
potential damage to our brand and reputation due to compliance with local laws, including potential censorship or
requirements to provide user information to local authorities;
fluctuations in currency exchange rates and compliance with currency controls;
foreign exchange controls and tax regulations that might prevent us from repatriating cash earned in countries outside
the United States or otherwise limit our ability to move cash freely, and impede our ability to invest such cash efficiently;
higher levels of credit risk and payment fraud;
enhanced difficulties of integrating any foreign acquisitions;
burdens of complying with a variety of foreign laws;
reduced protection for intellectual property rights in some countries;
difficulties in staffing, managing, and overseeing global operations and the increased travel, infrastructure, and legal
compliance costs associated with multiple international locations;
compliance with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar laws in other jurisdictions;
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compliance with statutory equity requirements and management of tax consequences.
If we are unable to expand internationally and manage the complexity of our global operations successfully, our financial results could
be adversely affected.
We face design, manufacturing, and supply chain risks that, if not properly managed, could adversely impact our financial results.
We face a number of risks related to design, manufacturing, and supply chain management with respect to our Oculus products.
For example, the Oculus products we sell may have quality issues resulting from the design or manufacture of the products, or from
the software used in the products. Sometimes, these issues may be caused by components we purchase from other manufacturers or
suppliers. If the quality of our Oculus products does not meet our customers' expectations or such products are found to be defective,
then our financial results could be adversely affected.
We rely on third parties to manufacture our Oculus products. We may experience supply shortages or other supply chain disruptions
in the future that could negatively impact our operations. We could be negatively affected if we are not able to engage third parties
with the necessary capabilities or capacity on reasonable terms, or if those we engage with fail to meet their obligations (whether due
to financial difficulties or other reasons), or make adverse changes in the pricing or other material terms of such arrangements with
them.
We also require the suppliers and business partners of our Oculus products to comply with law and certain company policies
regarding sourcing practices, but we do not control them or their practices. If any of them violates laws or implements practices
regarded as unethical, we could experience supply chain disruptions, canceled orders, terminations of or damage to our reputation.
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In addition, the Securities and Exchange Commission’s conflict minerals rule requires disclosure by public companies of the
origin, source and chain of custody of specified minerals, known as conflict minerals, that are necessary to the functionality or
production of products manufactured or contracted to be manufactured. We may incur significant costs associated with complying
with the rule, such as costs related to the determination of the origin, source and chain of custody of the minerals used in Oculus
products, the adoption of conflict minerals-related governance policies, processes and controls, and possible changes to products or
sources of supply as a result of such activities.
We may face inventory risk with respect to our Oculus products.
We may be exposed to inventory risks with respect to our Oculus products as a result of rapid changes in product cycles and
pricing, defective merchandise, changes in consumer demand and consumer spending patterns, changes in consumer tastes with respect
to Oculus products, and other factors. We endeavor to accurately predict these trends and avoid overstocking or understocking products
Oculus may sell. Demand for products, however, can change significantly between the time inventory or components are ordered and
the date of sale. In addition, when we begin selling or manufacturing a new Oculus product, it may be difficult to establish vendor
relationships, determine appropriate product or component selection, and accurately forecast demand. The acquisition of certain types
of inventory or components may require significant lead-time and prepayment and they may not be returnable. Any one of these
factors may adversely affect our operating results.
We may incur a substantial amount of indebtedness, which could adversely affect our financial condition.
In August 2013, we entered into a five-year senior unsecured revolving credit facility under which we may borrow up to $6.5
billion to fund working capital and general corporate purposes. As of December 31, 2015, no amounts were outstanding under this
facility. If we draw down on this facility in the future, our interest expense and principal repayment requirements will increase
significantly, which could have an adverse effect on our financial results.
We may require additional capital to support our business growth, and this capital may not be available on acceptable terms, if at
all.
We may require additional capital to support our business growth or to respond to business opportunities, challenges or
unforeseen circumstances. Our ability to obtain additional capital, if and when required, will depend on our business plans, investor
demand, our operating performance, the condition of the capital markets, and other factors. If we raise additional funds through the
issuance of equity, equity-linked or debt securities, those securities may have rights, preferences, or privileges senior to the rights of
our Class A common stock, and our existing stockholders may experience dilution. If we are unable to obtain additional capital when
required, or are unable to obtain additional capital on satisfactory terms, our ability to continue to support our business growth or to
respond to business opportunities, challenges, or unforeseen circumstances could be adversely affected, and our business may be
harmed.
We may have exposure to greater than anticipated tax liabilities.
Our income tax obligations are based in part on our corporate operating structure and intercompany arrangements, including
the manner in which we operate our business, develop, value, manage, protect, and use our intellectual property and the valuations
of our intercompany transactions. The tax laws applicable to our business, including the laws of the United States and other jurisdictions,
are subject to interpretation and certain jurisdictions are aggressively interpreting their laws in new ways in an effort to raise additional
tax revenue from companies such as Facebook. The taxing authorities of the jurisdictions in which we operate may challenge our
methodologies for valuing developed technology or intercompany arrangements, which could increase our worldwide effective tax
rate and harm our financial position and results of operations. We are subject to regular review and audit by U.S. federal and state and
foreign tax authorities. Tax authorities may disagree with certain positions we have taken and any adverse outcome of such a review
or audit could have a negative effect on our financial position and results of operations. In addition, the determination of our worldwide
provision for income taxes and other tax liabilities requires significant judgment by management, and there are many transactions
where the ultimate tax determination is uncertain. Our provision for income taxes is also determined by the manner in which we
operate our business, and any changes to such operations or laws applicable to such operations may affect our effective tax rate.
Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial
statements and may materially affect our financial results in the period or periods for which such determination is made. In addition,
our future income taxes could be adversely affected by earnings being lower than anticipated in jurisdictions that have lower statutory
tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, by changes in the valuation of our deferred
tax assets and liabilities, or by changes in tax laws, regulations, or accounting principles. For example, we have previously incurred
losses in certain international subsidiaries that resulted in an effective tax rate that is significantly higher than the statutory tax rate in
the United States and this could continue to happen in the future.
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Changes in tax laws or tax rulings could materially affect our financial position and results of operations.
The tax regimes we are subject to or operate under are unsettled and may be subject to significant change. Changes in tax laws
or tax rulings, or changes in interpretations of existing laws, could materially affect our financial position and results of operations.
Many countries in Europe, as well as a number of other countries and organizations, have recently proposed or recommended changes
to existing tax laws or have enacted new laws that could significantly increase our tax obligations in many countries where we do
business or require us to change the manner in which we operate our business. For example, in 2015 the United Kingdom enacted the
Diverted Profits Tax and Australia passed The Tax Integrity Multinational Anti-avoidance Law, both of which could increase our tax
obligations. The Organization for Economic Cooperation and Development has been working on a Base Erosion and Profit Sharing
Project, and has issued in 2015, and is expected to continue to issue, guidelines and proposals that may change various aspects of the
existing framework under which our tax obligations are determined in many of the countries in which we do business. The European
Commission has conducted investigations in multiple countries focusing on whether local country tax rulings or tax legislation provides
preferential tax treatment that violates European Union state aid rules. These investigations may result in changes to the tax treatment
of our foreign operations. In addition, the current U.S. administration and key members of Congress have made public statements
indicating that tax reform is a priority. Certain changes to U.S. tax laws, including limitations on the ability to defer U.S. taxation on
earnings outside of the United States until those earnings are repatriated to the United States, could affect the tax treatment of our
foreign earnings. Due to the large and expanding scale of our international business activities, many of these types of changes to the
taxation of our activities could increase our worldwide effective tax rate and harm our financial position and results of operations.
Risks Related to Ownership of Our Class A Common Stock
The trading price of our Class A common stock has been and will likely continue to be volatile.
The trading price of our Class A common stock has been, and is likely to continue to be, volatile. Since shares of our Class A
common stock were sold in our IPO in May 2012 at a price of $38.00 per share, our stock price has ranged from $17.55 to $110.65
through December 31, 2015. In addition to the factors discussed in this Annual Report on Form 10-K, the trading price of our Class A
common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
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actual or anticipated fluctuations in our revenue and other operating results;
the financial projections we may provide to the public, any changes in these projections or our failure to meet these
projections;
actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities
analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
additional shares of our Class A common stock being sold into the market by us, our existing stockholders, or in connection
with acquisitions, including shares sold by our employees to cover tax liabilities in connection with RSU vesting events,
or the anticipation of such sales;
investor sentiment with respect to our competitors, our business partners, and our industry in general;
announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic
partnerships, joint ventures, or capital commitments;
announcements by us or estimates by third parties of actual or anticipated changes in the size of our user base, the level
of user engagement, or the effectiveness of our ad products;
changes in operating performance and stock market valuations of technology companies in our industry, including our
developers and competitors;
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
the inclusion or deletion of our Class A common stock from any trading indices, such as the S&P 500 Index;
media coverage of our business and financial performance;
lawsuits threatened or filed against us;
developments in anticipated or new legislation and pending lawsuits or regulatory actions, including interim or final
rulings by tax, judicial, or regulatory bodies; and
other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.
24
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect
the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in
a manner unrelated or disproportionate to the operating performance of those companies. We are currently subject to securities litigation
in connection with our IPO. We may experience more such litigation following future periods of volatility. Any securities litigation
could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our
business.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance
the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a
result, you may only receive a return on your investment in our Class A common stock if the trading price of our Class A common
stock increases. In addition, our credit facility contains restrictions on our ability to pay dividends.
The dual class structure of our common stock and a voting agreement between certain stockholders have the effect of concentrating
voting control with our CEO and certain other holders of our Class B common stock; this will limit or preclude your ability to
influence corporate matters.
Our Class B common stock has ten votes per share, and our Class A common stock has one vote per share. Stockholders who
hold shares of Class B common stock, including certain of our executive officers, employees, and directors and their affiliates, together
hold a substantial majority of the voting power of our outstanding capital stock. Because of the ten-to-one voting ratio between our
Class B and Class A common stock, the holders of our Class B common stock collectively control a majority of the combined voting
power of our common stock and therefore are able to control all matters submitted to our stockholders for approval so long as the
shares of Class B common stock represent at least 9.1% of all outstanding shares of our Class A and Class B common stock. This
concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future.
Transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject
to limited exceptions, such as certain transfers effected for estate planning or charitable purposes. The conversion of Class B common
stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B
common stock who retain their shares in the long term. If, for example, Mr. Zuckerberg retains a significant portion of his holdings
of Class B common stock for an extended period of time, he could, in the future, continue to control a majority of the combined voting
power of our Class A common stock and Class B common stock.
We have elected to take advantage of the "controlled company" exemption to the corporate governance rules for NASDAQ-listed
companies, which could make our Class A common stock less attractive to some investors or otherwise harm our stock price.
Because we qualify as a "controlled company" under the corporate governance rules for NASDAQ-listed companies, we are
not required to have a majority of our board of directors be independent, nor are we required to have a compensation committee or
an independent nominating function. In light of our status as a controlled company, our board of directors determined not to have an
independent nominating function and chose to have the full board of directors be directly responsible for nominating members of our
board, and in the future we could elect not to have a majority of our board of directors be independent or not to have a compensation
committee. Accordingly, should the interests of our controlling stockholder differ from those of other stockholders, the other
stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance
rules for NASDAQ-listed companies. Our status as a controlled company could make our Class A common stock less attractive to
some investors or otherwise harm our stock price.
Delaware law and provisions in our restated certificate of incorporation and bylaws could make a merger, tender offer, or proxy
contest difficult, thereby depressing the trading price of our Class A common stock.
Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage,
delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a
period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing
stockholders. In addition, our restated certificate of incorporation and bylaws contain provisions that may make the acquisition of our
company more difficult, including the following:
•
•
until the first date on which the outstanding shares of our Class B common stock represent less than 35% of the combined
voting power of our common stock, any transaction that would result in a change in control of our company requires
the approval of a majority of our outstanding Class B common stock voting as a separate class;
we have a dual class common stock structure, which provides Mr. Zuckerberg with the ability to control the outcome
of matters requiring stockholder approval, even if he owns significantly less than a majority of the shares of our outstanding
25
Class A and Class B common stock;
when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power
of common stock, certain amendments to our restated certificate of incorporation or bylaws will require the approval of
two-thirds of the combined vote of our then-outstanding shares of Class A and Class B common stock;
when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power
of our common stock, vacancies on our board of directors will be able to be filled only by our board of directors and
not by stockholders;
when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power
of our common stock, our board of directors will be classified into three classes of directors with staggered three-year
terms and directors will only be able to be removed from office for cause;
when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power
of our common stock, our stockholders will only be able to take action at a meeting of stockholders and not by written
consent;
only our chairman, our chief executive officer, our president, or a majority of our board of directors are authorized to
call a special meeting of stockholders;
advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters
before an annual meeting of stockholders;
our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established,
and shares of which may be issued, without stockholder approval; and
certain litigation against us can only be brought in Delaware.
•
•
•
•
•
•
•
•
26
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters are located in Menlo Park, California. As of December 31, 2015, we owned and leased approximately
two million square feet for our corporate headquarters and 114 acres of land to accommodate anticipated future growth.
In addition, we leased office and data center facilities around the world totaling three million square feet. We also own data centers
in various locations throughout the United States, and a data center facility in Sweden.
During 2015, we entered into an agreement to lease an entire office building in London, United Kingdom, that is currently under
construction. As a result of our involvement during the construction period, we are considered for accounting purposes to be the owner
of the construction project. As such, we have excluded the square footage from the total leased space and owned properties, disclosed
above.
We believe that our facilities are adequate for our current needs.
Item 3. Legal Proceedings
Beginning on May 22, 2012, multiple putative class actions, derivative actions, and individual actions were filed in state and federal
courts in the United States and in other jurisdictions against us, our directors, and/or certain of our officers alleging violation of securities
laws or breach of fiduciary duties in connection with our initial public offering (IPO) and seeking unspecified damages. We believe these
lawsuits are without merit, and we intend to continue to vigorously defend them. The vast majority of the cases in the United States,
along with multiple cases filed against The NASDAQ OMX Group, Inc. and The Nasdaq Stock Market LLC (collectively referred to
herein as NASDAQ) alleging technical and other trading-related errors by NASDAQ in connection with our IPO, were ordered centralized
for coordinated or consolidated pre-trial proceedings in the U.S. District Court for the Southern District of New York. In a series of rulings
in 2013 and 2014, the court denied our motion to dismiss the consolidated securities class action and granted our motions to dismiss the
derivative actions against our directors and certain of our officers. On July 24, 2015, the court of appeals affirmed the dismissal of the
derivative actions. On December 11, 2015, the court granted plaintiffs' motion for class certification in the consolidated securities action.
In addition, the events surrounding our IPO became the subject of various state and federal government inquiries. In May 2014, the
Securities and Exchange Commission (SEC) notified us that it had terminated its inquiry and that no enforcement action had been
recommended by the SEC.
In addition, we are also currently parties to multiple other lawsuits related to our products, including intellectual property lawsuits
as well as class action lawsuits brought by users and marketers, and we may in the future be subject to additional lawsuits and disputes.
We are also involved in other claims, government and regulatory investigations, and proceedings arising from the ordinary course of our
business.
Item 4. Mine Safety Disclosures
Not applicable.
27
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information for Common Stock
Our Class A common stock has been listed on the NASDAQ Global Select Market under the symbol "FB" since May 18, 2012.
Prior to that time, there was no public market for our stock. The following table sets forth for the indicated periods the high and low
intra-day sales prices per share for our Class A common stock on the NASDAQ Global Select Market.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2015
2014
High
Low
High
Low
$
$
$
$
86.07
89.40
99.24
110.65
$
$
$
$
73.45
76.79
72.00
88.36
$
$
$
$
72.59
68.00
79.71
82.17
$
$
$
$
51.85
54.66
62.21
70.32
Our Class B common stock is not listed nor traded on any stock exchange.
Holders of Record
As of December 31, 2015, there were 5,086 stockholders of record of our Class A common stock, and the closing price of our
Class A common stock was $104.66 per share as reported on the NASDAQ Global Select Market. Because many of our shares of
Class A common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number
of stockholders represented by these record holders. As of December 31, 2015, there were 46 stockholders of record of our Class B
common stock.
Dividend Policy
We have never declared or paid any cash dividend on our common stock. We intend to retain any future earnings and do not
expect to pay dividends in the foreseeable future. In addition, our credit facility contains restrictions on our ability to pay dividends.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The table below provides information with respect to repurchases of unvested shares of our Class A common stock.
Period
October 1 – October 31, 2015
November 1 – November 30, 2015
December 1 – December 31, 2015
Total Number of
Shares Purchased (1)
1,132 $
—
—
Weighted Average
Price Paid per Share
1.09
—
—
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
—
—
—
—
—
—
(1) Unvested acquisition shares are subject to a right of repurchase by us in the event the recipient of such unvested acquisition shares is no longer employed by
us. All shares in the above table were shares repurchased as a result of us exercising this right and not pursuant to a publicly announced plan or program.
Recent Sale of Unregistered Securities and Use of Proceeds
Recent Sale of Unregistered Securities
None.
28
Stock Performance Graph
This performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liabilities under that Section, and shall not
be deemed to be incorporated by reference into any filing of Facebook, Inc. under the Securities Act or the Exchange Act.
The following graph shows a comparison from May 18, 2012 (the date our Class A common stock commenced trading on the
NASDAQ Global Select Market) through December 31, 2015 of the cumulative total return for our Class A common stock, the Standard
& Poor's 500 Stock Index (S&P 500 Index) and the Nasdaq Composite Index (NASDAQ Composite). The graph assumes that $100
was invested at the market close on May 18, 2012 in the Class A common stock of Facebook, Inc., the S&P 500 Index and the NASDAQ
Composite and data for the S&P 500 Index and the NASDAQ Composite assumes reinvestments of gross dividends. The stock price
performance of the following graph is not necessarily indicative of future stock price performance.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this item with respect to our equity compensation plans is incorporated by reference to our Proxy
Statement for the 2016 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days
of the fiscal year ended December 31, 2015.
29
Item 6. Selected Financial Data.
You should read the following selected consolidated financial data in conjunction with Part II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements and the related notes included
in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
The consolidated statements of income data for each of the years ended December 31, 2015, 2014, and 2013 and the consolidated
balance sheets data as of December 31, 2015 and 2014 are derived from our audited consolidated financial statements included in Part
II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. The consolidated statements of income
data for the years ended December 31, 2012 and 2011 and the consolidated balance sheets data as of December 31, 2013, 2012, and 2011
are derived from our audited consolidated financial statements, except as otherwise noted, that are not included in this Annual Report on
Form 10-K. Our historical results are not necessarily indicative of our results in any future period.
Year Ended December 31,
2015
2014
2013
2012
2011
(in millions, except per share data)
Consolidated Statements of Income Data:
Revenue
Total costs and expenses(1)
Income from operations
Income before provision for income taxes
Net income
Net income attributable to Class A and Class B
common stockholders
Earnings per share attributable to Class A and
Class B common stockholders (2):
$
17,928
$
12,466
$
7,872
$
5,089
$
11,703
6,225
6,194
3,688
3,669
7,472
4,994
4,910
2,940
2,925
5,068
2,804
2,754
1,500
1,491
4,551
538
494
53
32
Basic
Diluted
$
$
1.31
1.29
$
$
1.12
1.10
$
$
0.62
0.60
$
$
0.02
0.01
$
$
3,711
1,955
1,756
1,695
1,000
668
0.52
0.46
(1) Total costs and expenses include $2.97 billion, $1.84 billion, $906 million, $1.57 billion, and $217 million of share-based compensation for the years ended
December 31, 2015, 2014, 2013, 2012, and 2011, respectively.
(2) See Note 3 of the accompanying notes to our consolidated financial statements for a description of our computation of basic and diluted earnings per share attributable
to Class A and Class B common stockholders.
Consolidated Balance Sheets Data:
Cash, cash equivalents, and marketable securities
Working capital(1)
Property and equipment, net
Total assets(1)
Capital lease obligations
Long-term debt
Total liabilities(1)
Additional paid-in capital
Total stockholders' equity
2015
2014
As of December 31,
2013
(in millions)
2012
2011
$
18,434
$
11,199
$
11,449
$
9,626
$
19,727
5,687
49,407
114
—
5,189
34,886
44,218
11,966
3,967
39,966
233
—
3,870
30,225
36,096
11,801
2,882
17,858
476
—
2,388
12,297
15,470
9,939
2,391
14,982
856
1,500
3,227
10,094
11,755
3,908
3,679
1,475
6,331
677
—
1,432
2,684
4,899
(1)
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU
2015-17), which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet.
We early adopted this standard retrospectively and reclassified all of our current deferred tax assets to noncurrent deferred tax assets on our consolidated balance
sheets data for all periods presented. As a result of the reclassifications, certain noncurrent deferred tax liabilities as of December 31, 2014, 2013, and 2012 were
netted with noncurrent deferred tax assets.
30
Free Cash Flow
In addition to other financial measures presented in accordance with U.S. generally accepted accounting principles (GAAP), we
monitor free cash flow (FCF) as a non-GAAP measure to manage our business, make planning decisions, evaluate our performance, and
allocate resources. We define FCF as net cash provided by operating activities reduced by purchases of property and equipment and
property and equipment acquired under capital leases.
We believe that FCF is one of the key financial indicators of our business performance over the long term and provides useful
information regarding how cash provided by operating activities compares to the property and equipment investments required to maintain
and grow our business. We have chosen to subtract both purchases of property and equipment and property and equipment acquired under
capital leases in our calculation of FCF because we believe that these two items collectively represent the amount of property and equipment
we need to procure to support our business, regardless of whether we finance such property or equipment with a capital lease. The market
for financing servers and other technical equipment is dynamic and we expect our use of capital leases could vary significantly from year
to year.
We have chosen our definition for FCF because we believe that this methodology can provide useful supplemental information to
help investors better understand underlying trends in our business. We use FCF in discussions with our senior management and board of
directors.
FCF has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of other GAAP
financial measures, such as net cash provided by operating activities. Some of the limitations of FCF are:
•
•
FCF does not reflect our future contractual commitments; and
other companies in our industry present similarly titled measures differently than we do, limiting their usefulness as
comparative measures.
Management compensates for the inherent limitations associated with using the FCF measure through disclosure of such limitations,
presentation of our financial statements in accordance with GAAP, and reconciliation of FCF to the most directly comparable GAAP
measure, net cash provided by operating activities, as presented below.
The following is a reconciliation of FCF to the most comparable GAAP measure, net cash provided by operating activities:
Year Ended December 31,
2015
2014
2013
2012
2011
(in millions)
Net cash provided by operating activities (1)
Purchases of property and equipment
Property and equipment acquired under capital leases
Free cash flow
$
$
$
8,599
(2,523)
—
$
5,457
(1,831)
—
6,076
$
3,626
$
4,222
(1,362)
(11)
2,849
$
$
1,612
(1,235)
(340)
37
$
$
1,549
(606)
(473)
470
(1) For the year ended December 31, 2012, net cash provided by operating activities was reduced by $451 million of income tax refundable from income tax loss
carrybacks due to the recognition of tax benefits related to share-based compensation from restricted stock units granted prior to January 1, 2011. We received
substantially all of this refund in 2013 which increased our net cash provided by operating activities and FCF for the year ended December 31, 2013.
31
Item 7. 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 our consolidated financial
statements and the related notes included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on
Form 10-K. In addition to our historical 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 Annual Report
on Form 10-K, particularly in Part I, Item 1A, "Risk Factors." For a discussion of limitations in the measurement of certain of our user
metrics, see the section entitled "Limitations of Key Metrics and Other Data" in this Annual Report on Form 10-K.
Certain revenue information in the sections entitled "Executive Overview of Full Year 2015 Results" and "—Revenue—Foreign Exchange
Impact on Revenue" is presented on a constant currency basis. This information is a non-GAAP financial measure. To calculate revenue
on a constant currency basis, we translated revenue for the fourth quarter of and full year 2015 using 2014 monthly exchange rates for
our settlement currencies other than the U.S. dollar. This non-GAAP financial measure is not intended to be considered in isolation or
as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. This measure may be different
from non-GAAP financial measures used by other companies, limiting its usefulness for comparison purposes. Moreover, presentation
of revenue on a constant currency basis is provided for year-over-year comparison purposes, and investors should be cautioned that the
effect of changing foreign currency exchange rates has an actual effect on our operating results. We believe this non-GAAP financial
measure provides investors with useful supplemental information about the financial performance of our business, enable comparison
of financial results between periods where certain items may vary independent of business performance, and allows for greater
transparency with respect to key metrics used by management in operating our business.
Executive Overview of Full Year 2015 Results
Our key user metrics and financial results for 2015 are as follows:
User growth:
• Daily active users (DAUs) were 1.04 billion on average for December 2015, an increase of 17% year-over-year.
• Mobile DAUs were 934 million on average for December 2015, an increase of 25% year-over-year.
• Monthly active users (MAUs) were 1.59 billion as of December 31, 2015, an increase of 14% year-over-year.
• Mobile MAUs were 1.44 billion as of December 31, 2015, an increase of 21% year-over-year.
Financial results:
• Revenue was $17.93 billion, up 44% year-over-year (or 53% year-over-year on a constant currency basis), and ad revenue was
$17.08 billion, up 49% year-over-year (or 59% year-over-year on a constant currency basis).
• Total costs and expenses were $11.70 billion.
•
Income from operations was $6.23 billion.
• Net income was $3.69 billion with diluted earnings per share of $1.29.
• Capital expenditures were $2.52 billion.
• Effective tax rate was 40%.
• Cash and cash equivalents, and marketable securities were $18.43 billion as of December 31, 2015.
• Headcount was 12,691 as of December 31, 2015.
In 2015, we continued to make progress on our three main revenue growth priorities: (i) continuing to capitalize on the shift to
mobile, (ii) growing the number of marketers using our ad products, and (iii) making our ads more relevant and effective through continued
adoption of newer ad formats and tools for marketers.
In addition, we invested, and will continue to invest, across three priorities: (i) our core products and services to better serve our
existing communities and businesses, (ii) our next generation of services, such as Instagram, Messenger and WhatsApp, and (iii) our
long-term innovation efforts, such as connectivity efforts, virtual reality, and artificial intelligence research. We expect these investments
will continue to drive significant overall year-over-year expense growth compared to 2015.
32
Trends in Our User Metrics
The numbers for our key metrics, our daily active users (DAUs), mobile DAUs, MAUs, mobile MAUs, and average revenue per
user (ARPU), and certain other metrics such as mobile-only DAUs and mobile-only MAUs, do not include Instagram or WhatsApp users
unless they would otherwise qualify as such users, respectively, based on their other activities on Facebook. In addition, other user
engagement metrics do not include Instagram or WhatsApp unless otherwise specifically stated.
Trends in the number of users affect our revenue and financial results by influencing the number of ads we are able to show, the
value of our ads to marketers, the volume of Payments transactions, as well as our expenses and capital expenditures.
• Daily Active Users (DAUs). We define a daily active user as a registered Facebook user who logged in and visited Facebook
through our website or a mobile device, or used our Messenger application (and is also a registered Facebook user), on a given
day. We view DAUs, and DAUs as a percentage of MAUs, as measures of user engagement.
Note: For purposes of reporting DAUs, MAUs, and ARPU by geographic region, Europe includes all users in Russia and Turkey and Rest of World includes
all users in Africa, Latin America, and the Middle East.
33
Worldwide DAUs increased 17% to 1.04 billion on average during December 2015 from 890 million during December 2014.
We experienced growth in DAUs across major markets, including India, the United States, and Brazil. Overall growth in DAUs
was driven by increased mobile usage of Facebook, and the number of DAUs accessing Facebook on personal computers
decreased in December 2015, compared to the same period in 2014. We believe that use of Facebook through personal computers
will continue to decline in all regions.
• Mobile DAUs. We define a mobile DAU as a user who accessed Facebook via a mobile application or via mobile versions of
our website such as m.facebook.com, whether on a mobile phone or tablet, or used our Messenger application (and is also a
registered Facebook user) on a given day. We define a mobile-only DAU as a user who accessed Facebook solely through mobile
applications or mobile versions of our website on a given day, whereas a mobile DAU may have also accessed Facebook on a
personal computer on that day.
Worldwide mobile DAUs increased 25% to 934 million on average during December 2015 from 745 million during December
2014. In all regions, an increasing number of our DAUs accessed Facebook through mobile devices on average during December
2015, as compared to the same period during 2014, with users in India, Brazil, and the United States representing key sources
of mobile DAU growth on average during December 2015. On average during December 2015, there were 789 million mobile-
only DAUs, increasing 34% from 589 million mobile-only DAUs during the same period in 2014. The remaining mobile DAUs
accessed Facebook from both mobile devices and personal computers. We anticipate that growth in mobile users will continue
to be the driver of our user growth for the foreseeable future.
34
• 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 used our Messenger application (and is also a registered Facebook user),
in the last 30 days as of the date of measurement. MAUs are a measure of the size of our global active user community.
As of December 31, 2015, we had 1.59 billion MAUs, an increase of 14% from December 31, 2014. Users in India, the United
States, and Brazil represented key sources of growth in 2015. Overall growth in MAUs was driven by increased mobile usage
of Facebook, and the number of MAUs accessing Facebook on personal computers decreased in December 2015, compared to
the same period in 2014. We believe that use of Facebook through personal computers will continue to decline in all regions.
• Mobile MAUs. We define a mobile MAU as a user who accessed Facebook via a mobile application or via mobile versions of
our website such as m.facebook.com, whether on a mobile phone or tablet, or used our Messenger application (and is also a
registered Facebook user) during the period of measurement. We define a mobile-only MAU as a user who accessed Facebook
solely through mobile applications or mobile versions of our website during the period of measurement, whereas a mobile MAU
may have also accessed Facebook on a personal computer during the period of measurement.
35
Worldwide mobile MAUs increased 21% to 1.44 billion as of December 31, 2015 from 1.19 billion as of December 31, 2014.
In all regions, an increasing number of our MAUs accessed Facebook through mobile devices in 2015, as compared to the same
period in 2014, with users in India, Brazil, and the United States representing key sources of mobile MAU growth in 2015.
There were 823 million mobile-only MAUs as of December 31, 2015, increasing 56% from 526 million mobile-only MAUs
during the same period in 2014. The remaining 619 million mobile MAUs accessed Facebook from both mobile devices and
personal computers during December 2015. We anticipate that growth in mobile users will continue to be the driver of our user
growth for the foreseeable future.
36
Trends in Our Monetization by User Geography
We calculate our revenue by user geography based on our estimate of the geography in which ad impressions are delivered or
virtual and digital goods are purchased. We define ARPU as our total revenue in a given geography during a given quarter, divided by
the average of the number of MAUs in the geography at the beginning and end of the quarter. While ARPU includes all sources of revenue,
the number of MAUs used in this calculation only includes users of Facebook and Messenger as described in the definition of MAU
above. The geography of our users affects our revenue and financial results because we currently monetize users in different geographies
at different average rates. Our revenue and ARPU in regions such as United States & Canada and Europe are relatively higher primarily
due to the size and maturity of those online and mobile advertising markets. For example, ARPU in 2015 in the United States & Canada
region was more than seven times higher than in the Asia-Pacific region.
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 marketer or developer.
37
For 2015, worldwide ARPU was $11.96, an increase of 27% from 2014. Over this period, ARPU increased by 45% in United States
& Canada, 23% in Europe, 22% in Asia-Pacific, and 15% in Rest of World. The general strengthening of the U.S. dollar relative to certain
foreign currencies from 2014 to 2015 had an unfavorable impact on the growth rate of our ARPU outside the United States and Canada
region. In addition, user growth was more rapid in geographies with relatively lower ARPU, such as Asia-Pacific and Rest of World. We
expect that user growth in the future will be primarily concentrated in those regions where ARPU is relatively lower, such as Asia-Pacific
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.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). The
preparation of these 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. We evaluate our estimates and assumptions on an ongoing basis.
Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances.
Our actual results could differ from these estimates.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters
that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the
estimate that are reasonably possible could materially impact the financial statements. We believe that the assumptions and estimates
associated with revenue recognition for payments and other fees, income taxes, share-based compensation, loss contingencies, and business
combinations and valuation of goodwill and other acquired intangible assets have the greatest potential impact on our consolidated
financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of
our significant accounting policies, see Note 1 of our accompanying Notes to Consolidated Financial Statements included in Part II, Item
8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Revenue Recognition for Payments and Other Fees
We enable Payments from people to purchase virtual and digital goods from developers. People can make payments on Facebook
by using debit and credit cards, PayPal, mobile phone payments, gift cards, or other methods. We receive a fee from developers when a
person engages in a payment transaction for the purchase of a virtual or digital good on the Facebook website. The price of the virtual
or digital good is a price that is solely determined by the developer. We remit to the developer an amount that is based on the total amount
of transaction less the processing fee that we charge the developer for the service performed. Our revenue is the net amount of the
transaction representing our processing fee for the transaction. We record revenue on a net basis as we do not consider ourselves to be
the principal in the sale of the virtual or digital good to the person. Under GAAP guidance related to reporting revenue gross as a principal
versus net as an agent, the indicators used to determine whether an entity is a principal or an agent to a transaction are subject to judgment.
We consider ourselves the agent to these transactions when we apply the indicators to our facts. Should material subsequent changes in
the substance or nature of the transactions with developers result in us being considered the principal in such sales, we would reflect the
virtual and digital goods sale as revenue and the amounts paid to the developers as an associated cost.
Income Taxes
We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in
determining our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of
accounting principles and complex tax laws.
We record a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset
and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the financial reporting and tax bases of assets and liabilities, as well as for operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the
years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce our deferred
tax assets to the net amount that we believe is more likely than not to be realized.
We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will
be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe that we have
adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be
materially different. We make adjustments to these reserves when facts and circumstances change, such as the closing of a tax audit or
the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such
differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact
on our financial condition and operating results. The provision for income taxes includes the effects of any reserves that we believe are
appropriate, as well as the related net interest and penalties.
38
Share-based Compensation
We account for share-based employee compensation plans under the fair value recognition and measurement provisions in
accordance with applicable accounting standards, which require all share-based payments to employees, including grants of stock options
and restricted stock units (RSUs), to be measured based on the grant date fair value of the awards, with the resulting expense generally
recognized on a straight-line basis over the period during which the employee is required to perform service in exchange for the award.
Share-based compensation expense is recorded net of estimated forfeitures in our consolidated statements of income and as such
is recorded for only those share-based awards that we expect to vest. We estimate the forfeiture rate based on historical forfeitures of
equity awards and adjust the rate to reflect changes in facts and circumstances, if any. We will revise our estimated forfeiture rate if actual
forfeitures differ from our initial estimates.
We have historically issued unvested restricted shares to employee stockholders of certain acquired companies. As these awards
are generally subject to continued post-acquisition employment, we have accounted for them as post-acquisition share-based compensation
expense. We recognize compensation expense equal to the grant date fair value of the common stock on a straight-line basis over the
period during which the employee is required to perform service in exchange for the award.
Loss Contingencies
We are involved in various lawsuits, claims, investigations, and proceedings that arise in the ordinary course of business. Certain
of these matters include speculative claims for substantial or indeterminate amounts of damages. We record a liability when we believe
that it is both probable that a loss has been incurred and the amount can be reasonably estimated. Significant judgment is required to
determine both probability and the estimated amount. We review these provisions at least quarterly and adjust these provisions accordingly
to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information.
We believe that the amount or estimable range of reasonably possible loss, will not, either individually or in the aggregate, have
a material adverse effect on our business, consolidated financial position, results of operations, or cash flows with respect to loss
contingencies for legal and other contingencies as of December 31, 2015. However, the outcome of litigation is inherently uncertain.
Therefore, if one or more of these legal matters were resolved against us for amounts in excess of management's expectations, our results
of operations and financial condition, including in a particular reporting period, could be materially adversely affected.
Business Combinations and Valuation of Goodwill and Other Acquired Intangible Assets
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets
acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable
assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially
with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected
cash flows from acquired users, acquired technology, and trade names from a market participant perspective, useful lives, and discount
rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain
and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is one year from the
acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.
Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
We review goodwill for impairment at least annually or more frequently if events or changes in circumstances would more likely
than not reduce the fair value of our single reporting unit below its carrying value. We evaluate indefinite-lived intangible assets for
impairment annually or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is
impaired. As of December 31, 2015, no impairment of goodwill or indefinite-lived intangible assets has been identified.
Acquired finite-lived intangible assets are amortized over their estimated useful lives. We evaluate the recoverability of our
intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be
recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows
of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted
cash flows the assets are expected to generate. If such review indicates that the carrying amount of property and equipment and intangible
assets is not recoverable, the carrying amount of such assets is reduced to fair value. We have not recorded any significant impairment
charges during the years presented.
In addition to the recoverability assessment, we routinely review the remaining estimated useful lives of our finite-lived intangible
assets. If we reduce the estimated useful life assumption for any asset, the remaining unamortized balance would be amortized over the
revised estimated useful life.
39
Components of Results of Operations
Revenue
Advertising. We generate substantially all of our revenue from advertising. Our advertising revenue is generated by displaying
ad products on Facebook properties, including our mobile applications, and third-party affiliated websites or mobile applications.
Marketers pay for ad products either directly or through their relationships with advertising agencies, based on the number of clicks
made by people, the number of actions taken by people, or the number of impressions delivered. We recognize revenue from the
delivery of click-based ads in the period in which a person clicks on the content, and action-based ads in the period in which a person
takes the action the marketer contracted for. We recognize revenue from the display of impression-based ads in the contracted period
in which the impressions are delivered. Impressions are considered delivered when an ad is displayed to people. The number of ads
we show is subject to methodological changes as we continue to evolve our ads business and the structure of our ads products. We
calculate price per ad as total ad revenue divided by the number of ads delivered, representing the effective price paid per impression
by a marketer regardless of their desired objective such as impression, click, or action. For advertising revenue arrangements where
we are not the primary obligor, we recognize revenue on a net basis.
Payments and other fees. We enable Payments from people to purchase virtual and digital goods from our developers. People
can transact and make payments on the Facebook website by using debit and credit cards, PayPal, mobile phone payments, gift cards,
or other methods. We receive a fee from developers when people make purchases in these applications using our Payments
infrastructure. We recognize revenue net of amounts remitted to our developers. We have mandated the use of our Payments
infrastructure for game applications on Facebook, and fees related to Payments are generated almost exclusively from games. Our
other fees revenue, which has not been significant in recent periods, consists primarily of revenue from our ad serving and measurement
products and the delivery of virtual reality platform devices.
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, energy and
bandwidth 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, amortization of intangible assets, costs
associated with data partner arrangements, and cost of virtual reality platform device inventory sold.
Research and development. Research and development expenses consist primarily of share-based compensation, salaries,
and benefits 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 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 marketing and promotional expenditures, as well as amortization of intangible assets.
General and administrative. Our general and administrative expenses consist primarily of salaries, benefits, and share-based
compensation for certain of 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 professional and legal services. General and
administrative expenses also include depreciation of property and equipment and amortization of intangible assets we have acquired.
40
Results of Operations
The following tables set forth our consolidated statements of income data:
Consolidated Statements of Income Data:
Revenue
Costs and expenses:
Cost of revenue
Research and development
Marketing and sales
General and administrative
Total costs and expenses
Income from operations
Interest and other income/(expense), net
Income before provision for income taxes
Provision for income taxes
Net income
Share-based compensation expense included in costs and expenses:
Cost of revenue
Research and development
Marketing and sales
General and administrative
Total share-based compensation expense
Year Ended December 31,
2015
2014
2013
(in millions)
$
17,928
$
12,466
$
7,872
2,867
4,816
2,725
1,295
11,703
6,225
(31)
6,194
2,506
2,153
2,666
1,680
973
7,472
4,994
(84)
4,910
1,970
$
3,688
$
2,940
$
1,875
1,415
997
781
5,068
2,804
(50)
2,754
1,254
1,500
Year Ended December 31,
2015
2014
2013
(in millions)
62
1,328
249
198
1,837
$
$
$
$
81
2,350
320
218
2,969
$
$
42
604
133
127
906
The following tables set forth our consolidated statements of income data (as a percentage of revenue):
Consolidated Statements of Income Data:
Revenue
Costs and expenses:
Cost of revenue
Research and development
Marketing and sales
General and administrative
Total costs and expenses
Income from operations
Interest and other income/(expense), net
Income before provision for income taxes
Provision for income taxes
Net income
Year Ended December 31,
2015
2014
2013
100%
100%
100%
16
27
15
7
65
35
—
35
14
17
21
13
8
60
40
(1)
39
16
21%
24%
41
24
18
13
10
64
36
(1)
35
16
19%
Share-based compensation expense included in costs and expenses (as a percentage of revenue):
Cost of revenue
Research and development
Marketing and sales
General and administrative
Total share-based compensation expense
Revenue
Year Ended December 31,
2015
2014
2013
—%
13
2
1
17%
—%
11
2
2
15%
1%
8
2
2
12%
Year Ended December 31,
2015
2014
(in millions)
2013
2015 vs 2014
% Change
2014 vs 2013
% Change
Advertising
Payments and other fees
Total revenue
$
$
17,079
849
17,928
$
$
11,492
974
12,466
$
$
6,986
886
7,872
49 %
(13)%
44 %
65%
10%
58%
2015 Compared to 2014. Revenue in 2015 increased $5.46 billion, or 44% compared to 2014. The increase was primarily due
to an increase in advertising revenue.
The most important factor driving advertising revenue growth was an increase in revenue from ads in News Feed on mobile
devices. In 2015, we estimate that mobile advertising revenue represented approximately 77% of total advertising revenue, as compared
with approximately 65% in 2014. Factors that influenced our mobile advertising revenue growth in 2015 included (i) an increase in
demand for our ad inventory, in part driven by an increase in the number of marketers actively advertising on Facebook, (ii) an increase
in mobile user growth and engagement, and (iii) an increase in the number and frequency of ads displayed in News Feed, as well as
the quality, relevance, and performance of those ads.
In 2015 compared to 2014, the average price per ad increased by 140% and the number of ads delivered decreased by 38%.
The increase in average price per ad was driven by a product change related to certain non-News Feed ads during the third quarter of
2014, which decreased the number of ads displayed but increased the prominence of each ad. Average price per ad was also driven
by a mix shift towards a greater percentage of our ads being shown in News Feed. The reduction in ads delivered was driven by factors
including the product change described above as well as the shift in usage towards mobile devices where people are shown fewer ads
as compared to personal computers.
Advertising revenue in the fourth quarter of 2015 increased 57% compared to the same period in 2014. The increase in advertising
revenue in the fourth quarter of 2015 was driven by the same factors that drove 2015 annual advertising revenue growth, primarily
an increase in revenue from ads in News Feed on mobile devices. For the fourth quarter of 2015, we estimate that mobile advertising
revenue represented approximately 80% of total advertising revenue, as compared with 69% in the same period in 2014.
Advertising spending is traditionally seasonally strong in the fourth quarter of each year. We believe that this seasonality in
advertising spending affects our quarterly results, which generally reflect significant growth in advertising revenue between the third
and fourth quarters and a decline in advertising spending between the fourth and subsequent first quarters. For instance, our advertising
revenue increased 31%, 22%, and 30% between the third and fourth quarters of 2015, 2014, and 2013, respectively, while advertising
revenue for the first quarters of 2015 and 2014 declined 8% and 3% compared to the fourth quarters of 2014 and 2013, respectively.
Payments and other fees revenue in 2015 decreased $125 million, or 13%, compared to 2014. The decrease in Payments and
other fees revenue was a result of decreased Payments revenue from games played on personal computers, partially offset by an
increase in other fees revenue related to acquisitions closed in the second half of 2014.
Payments and other fees revenue in the fourth quarter of 2015 decreased $53 million, or 21%, compared to the same period in
2014.
42
Payments and other fees revenue is currently based predominantly on Payments revenue from games played on personal
computers. As users shift their usage to mobile devices, Facebook usage on personal computers has been declining and will continue
to decline in the future, resulting in a decline in our Payments revenue.
2014 Compared to 2013. Revenue in 2014 increased $4.59 billion, or 58% compared to 2013. The increase was due primarily
to a 65% increase in advertising revenue during 2014 as compared to 2013.
The most important factor driving advertising revenue growth was an increase in revenue from ads in News Feed on both mobile
devices and personal computers. News Feed ads are displayed more prominently, have significantly higher levels of engagement and
a higher price per ad relative to our other ad placements. In 2014, we estimate that mobile advertising revenue represented approximately
65% of total advertising revenue, as compared with 45% in 2013. Other factors that influenced our advertising revenue growth in
2014 included (i) an increase in the number of marketers actively advertising on Facebook, which we believe increased demand for
our ad inventory, (ii) other product changes to increase the value and performance of our ads, and (iii) an increase in user growth and
engagement.
In 2014 compared to 2013, the average price per ad increased by 173% and the number of ads delivered decreased by 40%.
The increase in average price per ad was driven by a product change related to certain non-News Feed ads during the third quarter of
2014, which decreased the number of ads displayed but increased the prominence of each ad. Average price per ad was also driven
by a mix shift towards a greater percentage of our ads being shown in News Feed. The reduction in ads delivered was driven by factors
including the product change described above as well as the shift in usage towards mobile devices where people are shown fewer ads
as compared to personal computers.
Payments and other fees revenue in 2014 increased $88 million, or 10%, compared to 2013. The increase in Payments and
other fees revenue is a result of increased revenue from our ad serving and measurement products and the delivery of virtual reality
platform devices.
No customer represented 10% or more of total revenue during the years ended December 31, 2015, 2014, and 2013.
Foreign Exchange Impact on Revenue
The general strengthening of the U.S. dollar relative to certain foreign currencies (primarily the Euro) from the fourth quarter
of and full year 2014 to the same periods in 2015 had an unfavorable impact on our revenue. If we had translated revenue for the
fourth quarter of and full year 2015 using 2014 monthly exchange rates for our settlement currencies other than the U.S. dollar, our
total revenue would have been $6.16 billion and $19.11 billion, respectively, and our advertising revenue would have been $5.96
billion and $18.26 billion, respectively. Using these constant rates, both revenue and advertising revenue would have been $322 million
and $1.19 billion higher than actual revenue and advertising revenue for the fourth quarter of and full year 2015, respectively.
There were no material foreign exchange impacts on our revenue and advertising revenue from the full year 2013 to the same
period in 2014.
Cost of revenue
Cost of revenue
Percentage of revenue
Year Ended December 31,
2015
2014
2013
$
2,867
(dollars in millions)
$
2,153
$
16%
17%
1,875
24%
2015 vs 2014
% Change
2014 vs 2013
% Change
33%
15%
2015 Compared to 2014. Cost of revenue in 2015 increased $714 million, or 33%, compared to 2014. The increase was primarily
due to an increase in operational expenses related to our data centers and technical infrastructure of $480 million, compared to 2014.
Amortization of our intangible assets in 2015 also increased $100 million compared to 2014, mostly due to the full year impact of
acquisitions completed in the second half of 2014.
2014 Compared to 2013. Cost of revenue in 2014 increased $278 million, or 15%, compared to 2013. The increase was primarily
due to operational expenses related to our data center and technical infrastructure and increased amortization of our intangible assets.
These increases were partially offset by items related to data center lease abandonment: we reversed $34 million of lease abandonment
expense in 2014 due to our decision to re-occupy and utilize a previously exited data center, compared to a recognition of $117 million
of lease abandonment expense in 2013.
43
In 2016, we anticipate that the cost of revenue will increase as we expand our data center capacity and technical infrastructure
to support user growth, increased user engagement, and the delivery of new products and services.
Research and development
Research and development
Percentage of revenue
Year Ended December 31,
2015
2014
2013
$
4,816
(dollars in millions)
$
2,666
$
27%
21%
1,415
18%
2015 vs 2014
% Change
2014 vs 2013
% Change
81%
88%
2015 Compared to 2014. Research and development expenses in 2015 increased $2.15 billion, or 81%, compared to 2014. The
majority of the increase was due to an increase in share-based compensation expense of $1.02 billion compared to 2014, which
reflected the full year impact of share-based compensation related to the acquisitions completed in the second half of 2014. In addition,
other payroll and benefits expense increased as a result of a 43% growth in employee headcount from December 31, 2014 to
December 31, 2015 in engineering and other technical functions.
2014 Compared to 2013. Research and development expenses in 2014 increased $1.25 billion, or 88%, compared to 2013. The
increase was primarily due to an increase of $724 million in share-based compensation expense compared to 2013, and an increase
in other payroll and benefits expense resulting from a 48% growth in employee headcount from December 31, 2013 to December 31,
2014 in engineering and other technical functions. Share-based compensation expense also increased due to the acquisitions we
completed in 2014.
In 2016, we plan to continue hiring software engineers and other technical employees and increasing our investment to support
our research and development initiatives.
Marketing and sales
Marketing and sales
Percentage of revenue
Year Ended December 31,
2015
2014
2013
$
2,725
(dollars in millions)
$
1,680
$
15%
13%
997
13%
2015 vs 2014
% Change
2014 vs 2013
% Change
62%
69%
2015 Compared to 2014. Marketing and sales expenses in 2015 increased $1.05 billion, or 62%, compared to 2014. The majority
of the increase was due to increases in amortization of our intangible assets of $305 million due to the full year impact of acquisitions
completed in the second half of 2014, and in payroll and benefits expenses as a result of a 32% increase in employee headcount from
December 31, 2014 to December 31, 2015 in our marketing and sales functions. Additionally, our marketing expenses increased $258
million in 2015, compared to 2014.
2014 Compared to 2013. Marketing and sales expenses in 2014 increased $683 million, or 69%, compared to 2013. The increase
was primarily due to an increase in payroll and benefits expenses resulting from a 44% increase in employee headcount from December
31, 2013 to December 31, 2014 in our marketing and sales functions. Our marketing expenses also increased $150 million in 2014,
compared to 2013. Additionally, share-based compensation expense also increased $116 million compared to 2013.
In 2016, we plan to continue to increase our investment and hire marketing and sales employees to support our marketing efforts.
General and administrative
General and administrative
Percentage of revenue
Year Ended December 31,
2015
2014
2013
$
1,295
(dollars in millions)
$
973
$
7%
8%
781
10%
44
2015 vs 2014
% Change
2014 vs 2013
% Change
33%
25%
2015 Compared to 2014. General and administrative expenses in 2015 increased $322 million, or 33%, compared to 2014. The
increase was primarily due to an increase in payroll and benefits expenses as a result of a 36% increase in employee headcount from
December 31, 2014 to December 31, 2015 in general and administrative functions, including an increase of $20 million in share-
based compensation expense in 2015, and to a lesser extent, higher legal and other professional services fees.
2014 Compared to 2013. General and administrative expenses in 2014 increased $192 million, or 25%, compared to 2013. The
increase was primarily due to an increase in payroll and benefits expenses resulting from a 55% increase in employee headcount in
general and administrative functions. Share-based compensation expense also increased $71 million compared to 2013. Additionally,
professional services expense in 2014 also increased $58 million primarily due to higher consulting and other professional service
fees.
In 2016, we plan to increase general and administrative employee headcount to support overall company growth.
Interest and other income/(expense), net
Year Ended December 31,
2015
2014
(in millions)
2013
2015 vs 2014
% Change
2014 vs 2013
% Change
Interest income/(expense), net
Other income/(expense), net
Interest and other income/(expense), net
$
$
$
29
(60)
(31) $
$
4
(88)
(84) $
(37)
(13)
(50)
625%
32%
63%
111 %
(577)%
(68)%
2015 Compared to 2014. Interest and other income/(expense), net in 2015 increased $53 million, or 63%, compared to 2014.
Other income/(expense), net increased primarily due to a decrease in foreign exchange losses resulting from the periodic re-
measurement of our foreign currency balances. In addition, interest income/(expense), net increased due to higher invested cash
balances and interest rates.
2014 Compared to 2013. Interest and other income/(expense), net in 2014 decreased $34 million, or 68%, compared to 2013.
Other income/(expense), net decreased primarily due to $87 million in foreign exchange losses resulting from the periodic re-
measurement of our foreign currency balances. The decrease in other income/(expense), net was partially offset by a decrease in
interest expense due to the repayment of our long-term debt in August 2013 and lower capital lease payments.
Provision for income taxes
Year Ended December 31,
2015
2014
2013
(dollars in millions)
2015 vs 2014
% Change
2014 vs 2013
% Change
Provision for income taxes
Effective tax rate
$
2,506
$
1,970
$
1,254
27%
57%
40%
40%
46%
2015 Compared to 2014. Our provision for income taxes in 2015 increased $536 million, or 27%, compared to 2014, primarily
due to an increase in income before provision for income taxes. Our effective tax rate in 2015 remained flat, compared to 2014.
Our effective tax rate differs from the U.S. statutory rate primarily because of the impact of acquiring intellectual property and
integrating it into our business, non-deductible share-based compensation, operations in jurisdictions with tax rates lower than the
U.S., and tax research credits. Our effective tax rate in the future will depend on the portion of our profits earned within and outside
the United States, which will also be affected by our methodologies for valuing our intellectual property and intercompany transactions.
Our future effective tax rate will also be affected by the timing, size, and integration of any acquisitions we make.
On July 27, 2015, the United States Tax Court issued an opinion in Altera Corp. v. Commissioner related to the treatment of
share-based compensation expense in an intercompany cost-sharing arrangement. This opinion concluded that related parties in a cost-
sharing arrangement are not required to share share-based compensation. A final decision was issued by the Tax Court, however, this
decision may be appealed by the Commissioner. The impact of the conclusions stated by the Tax Court in its opinion was not material
to our consolidated financial statements.
2014 Compared to 2013. Our provision for income taxes in 2014 increased $716 million, or 57%, compared to 2013, primarily
due to an increase in income before provision for income taxes. Our effective tax rate differs from the statutory rate due to non-
45
deductible share-based compensation, operations in jurisdictions with tax rates lower than the U.S., and tax research credits. Our
effective tax rate decreased primarily due to a change in our geographic mix of pre-tax income.
46
Quarterly Results of Operations Data
The following tables set forth our unaudited quarterly consolidated statements of income data in dollars and as a percentage
of total revenue for each of the eight quarters in the period ended December 31, 2015. We have prepared the quarterly consolidated
statements of income data on a basis consistent with the audited consolidated financial statements included in Part II, Item 8, "Financial
Statements and Supplementary Data" in this Annual Report on Form 10-K. In the opinion of management, the financial information
reflects all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of this
data. This information should be read in conjunction with the audited consolidated financial statements and related notes included in
Part II, Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K. The results of historical periods
are not necessarily indicative of the results of operations for any future period.
Research and development
1,314
1,271
1,170
1,062
1,111
824
720
668
654
653
Dec 31,
2015
Sep 30,
2015
Jun 30,
2015
Mar 31,
2015
Dec 31,
2014
Sep 30,
2014
Jun 30,
2014
Mar 31,
2014
Three Months Ended
(in millions)
$ 5,637
$ 4,299
$ 3,827
$ 3,317
$ 3,594
$ 2,957
$ 2,676
$ 2,265
204
202
215
226
257
246
234
5,841
4,501
4,042
3,543
3,851
3,203
2,910
237
2,502
462
455
323
187
1,427
1,075
—
1,075
433
642
3
$
565
608
374
259
1,806
1,397
(61)
1,336
530
806
4
$
473
492
358
197
1,520
1,390
(4)
1,386
595
791
3
$
772
371
3,281
2,560
(3)
2,557
995
$ 1,562
$
7
706
345
3,042
1,459
(27)
1,432
536
896
5
626
305
2,769
1,273
—
1,273
554
719
$
620
274
2,610
933
(1)
932
420
512
$
4
3
624
330
2,718
1,133
(19)
1,114
413
701
5
$
$ 1,555
$
891
$
715
$
509
$
696
$
802
$
788
$
639
Consolidated Statements of Income Data:
Revenue:
Advertising
Payments and other fees
Total revenue
Costs and expenses:
Cost of revenue
Marketing and sales
General and administrative
Total costs and expenses (1)
Income from operations
Interest and other income/(expense), net
Income before provision for income taxes
Provision for income taxes
Net income
Less: Net income attributable to participating
securities
Net income attributable to Class A and Class B
common stockholders
Earnings per share attributable to Class A and
Class B common stockholders:
Basic
Diluted
$ 0.55
$ 0.32
$ 0.26
$ 0.18
$ 0.25
$ 0.31
$ 0.31
$ 0.25
$ 0.54
$ 0.31
$ 0.25
$ 0.18
$ 0.25
$ 0.30
$ 0.30
$ 0.25
47
Share-based compensation expense included in costs and expenses:
Cost of revenue
Research and development
Marketing and sales
General and administrative
Three Months Ended
Dec 31,
2015
Sep 30,
2015
Jun 30,
2015
Mar 31,
2015
Dec 31,
2014
Sep 30,
2014
Jun 30,
2014
Mar 31,
2014
(in millions)
$
22
$
21
$
21
$
17
$
18
$
16
$
16
$
583
84
57
598
82
56
603
82
57
566
72
48
685
103
90
243
53
41
219
50
29
12
181
43
38
Total share-based compensation expense
$
746
$
757
$
763
$
703
$
896
$ 353
$
314
$
274
(1) Total costs and expenses increased in the fourth quarter of 2014 compared to the third quarter of 2014, primarily due to increases in share-based compensation
expense and amortization of intangible assets related to our acquisitions.
Dec 31,
2015
Sep 30,
2015
Jun 30,
2015
Mar 31,
2015
Dec 31,
2014
Sep 30,
2014
Jun 30,
2014
Mar 31,
2014
(as a percentage of total revenue)
Three Months Ended
Consolidated Statements of Income Data:
Revenue:
Advertising
Payments and other fees
Total revenue
Costs and expenses:
Cost of revenue
Research and development
Marketing and sales
General and administrative
Total costs and expenses
Income from operations
Interest and other income/(expense), net
Income before provision for income
taxes
Provision for income taxes
Net income
Less: Net income attributable to
participating securities
Net income attributable to Class A and
Class B common stockholders
97%
3
100%
96%
4
100%
95%
5
100%
94%
6
100%
93%
7
100%
92%
8
100%
92%
8
100%
91%
9
100%
14
22
13
6
56
44
—
44
17
16
28
16
8
68
32
(1)
32
12
17
29
15
8
69
31
—
31
14
18
30
17
8
74
26
—
26
12
17
29
16
9
71
29
—
29
11
18
19
12
8
56
44
(2)
42
17
16
17
12
7
52
48
—
48
20
18
18
13
7
57
43
—
43
17
27%
20%
18%
14%
18%
25%
27%
26%
—
—
—
—
—
—
—
—
27%
20%
18%
14%
18%
25%
27%
26%
48
Share-based compensation expense included in costs and expenses:
Cost of revenue
Research and development
Marketing and sales
General and administrative
Three Months Ended
Dec 31,
2015
Sep 30,
2015
Jun 30,
2015
Mar 31,
2015
Dec 31,
2014
Sep 30,
2014
Jun 30,
2014
Mar 31,
2014
(as a percentage of total revenue)
—%
10
1
1
—%
13
2
1
1%
15
2
1
—%
16
2
1
—%
18
3
2
—%
1%
—%
8
2
1
8
2
1
7
2
2
Total share-based compensation expense
13%
17%
19%
20%
23%
11%
11%
11%
Liquidity and Capital Resources
Consolidated Statements of Cash Flows Data:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Purchases of property and equipment
Depreciation and amortization
Share-based compensation
Year Ended December 31,
2015
2014
(in millions)
2013
$
$
8,599
(9,434)
1,582
(2,523)
1,945
2,960
$
5,457
(5,913)
1,571
(1,831)
1,243
1,786
4,222
(2,624)
(667)
(1,362)
1,011
906
Our principal sources of liquidity are our cash and cash equivalents, marketable securities, and cash generated from operations.
Cash and cash equivalents, and marketable securities consist primarily of cash on deposit with banks, investments in money market
funds, and investments in U.S. government securities, U.S. government agency securities, and corporate debt securities. Cash and
cash equivalents, and marketable securities were $18.43 billion as of December 31, 2015, an increase of $7.24 billion from
December 31, 2014, primarily due to $8.60 billion of cash generated from operations and $1.72 billion in excess tax benefits from
share-based award activity, partially offset by $2.52 billion for purchases of property and equipment and $313 million for acquisitions
of businesses and other assets.
Cash paid for income taxes (net of refunds) was $270 million for the year ended December 31, 2015. As of December 31, 2015,
our federal net operating loss carryforward was $2.70 billion, although we anticipate only a relatively small portion of this will be
available to offset our federal taxable income in 2016. As of December 31, 2015, we had $1.08 billion of federal tax credits, substantially
all of which will be available to offset our federal tax liabilities in 2016. We expect that the amount of cash paid for income taxes to
significantly increase in 2016.
In August 2013, we entered into a five-year senior unsecured revolving credit facility (2013 Revolving Credit Facility) that
allows us to borrow up to $6.5 billion to fund working capital and general corporate purposes with interest payable on the borrowed
amounts set at LIBOR plus 1.0%, as well as an annual commitment fee of 0.10% on the daily undrawn balance of the facility. We
paid origination fees at closing of the 2013 Revolving Credit Facility, which fees are being amortized over the term of the facility.
Any amounts outstanding under this facility will be due and payable on August 15, 2018. As of December 31, 2015, no amounts had
been drawn down and we were in compliance with the covenants under this credit facility.
As of December 31, 2015, $1.90 billion of the $18.43 billion in cash and cash equivalents, and marketable securities was held
by our foreign subsidiaries. Substantially all of these funds are in jurisdictions for which we are indefinitely reinvesting the earnings
of the local subsidiary. We have provided residual taxes in jurisdictions where we do not intend to indefinitely reinvest the earnings
of the local subsidiary, however the amount of taxes provided has been insignificant.
We currently anticipate that our available funds, credit facility, and cash flow from operations will be sufficient to meet our
operational cash needs for the foreseeable future.
49
Cash Provided by Operating Activities
Cash flow from operating activities during 2015, mostly consisted of net income, adjusted for certain non-cash items, such as
share-based compensation expense of $2.96 billion and total depreciation and amortization of $1.95 billion. The increase in cash flow
from operating activities during 2015 compared to 2014, was primarily due to an increase in net income, as adjusted for share-based
compensation expense, and higher income tax payable as of December 31, 2015 compared to 2014.
Cash flow from operating activities during 2014, primarily consisted of net income, adjusted for certain non-cash items, such
as share-based compensation expense of $1.79 billion and total depreciation and amortization of $1.24 billion. The cash flow from
operating activities during 2014 compared to 2013 increased mainly due to an increase in net income of $1.44 billion, as adjusted for
certain non-cash items described above, partially offset by a decrease in income tax refunds of $415 million.
Cash flow from operating activities during 2013, primarily consisted of net income, adjusted for certain non-cash items, such
as depreciation and amortization of $1.01 billion and share-based compensation expense of $906 million, and an increase in other
liabilities related to uncertain tax positions. The cash flow from operating activities during 2013 compared to 2012 increased mainly
due to an increase in net income of $1.45 billion and uncertain tax position of $786 million. In addition, we received income tax
refunds of $421 million in 2013.
Cash Used in Investing Activities
Cash used in investing activities was $9.43 billion during 2015, primarily due to $6.70 billion for net purchases of marketable
securities and $2.52 billion for capital expenditures as we continued to invest in servers, data centers, network infrastructure, and
office buildings. The increase in cash used in investing activities during 2015 compared to 2014 was mainly due to increases in net
purchases of marketable securities, partially offset by a decrease in acquisitions of businesses and purchases of intangible assets.
Cash used in investing activities during 2014 primarily resulted from $4.98 billion for the acquisition of businesses and $1.83
billion for capital expenditures related to network infrastructure and the construction of data centers and office buildings, partially
offset by $1.24 billion for the net sales and maturities of marketable securities. The increase in cash used in investing activities during
2014 compared to 2013 was mainly due to increases in acquisitions of businesses and purchases of intangible assets, and capital
expenditures, partially offset by net sales of marketable securities.
Cash used in investing activities during 2013 primarily resulted from $1.36 billion for capital expenditures related to the purchase
of servers, network infrastructure, and the construction of data centers, as well as $882 million for the net purchase of marketable
securities and $368 million for the acquisition of businesses and other assets, such as patents. The decrease in cash used in investing
activities during 2013 compared to 2012 was mainly due to decreases in the purchase of marketable securities and the acquisitions
of businesses and purchases of intangible assets.
We anticipate making capital expenditures in 2016 of approximately $4.0 billion to $4.5 billion.
Cash Provided by (Used in) Financing Activities
Cash flow from financing activities during 2015, mostly consisted of excess tax benefit from share-based award activity and
principal payments on capital lease obligations. The increase in cash provided by financing activities was mostly due to lower principal
payments related to our capital lease transactions and lower tax payments related to the net share settlement, partially offset by a
decrease of excess tax benefit from share-based award activity.
Cash provided by financing activities during 2014 was $1.57 billion, which primarily resulted from $1.87 billion of excess tax
benefit from share-based award activity, partially offset by $243 million of payments related to our capital lease transactions, and $73
million of tax payments related to net share settlement resulting mainly from the vested merger consideration of an acquisition.
Cash used in financing activities during 2013 was $667 million, which primarily resulted from $1.50 billion for repayment of
debt and $889 million of tax payments related to the net share settlement, partially offset by $1.48 billion in net proceeds from the
completion of our follow-on equity offering in December 2013.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of December 31, 2015.
50
Contractual Obligations
Our principal commitments consist of obligations under operating and capital leases for equipment, office, and data center facilities.
The following table summarizes our commitments to settle contractual obligations in cash as of December 31, 2015 (in millions):
Total
Less than
1 Year
1-3
Years
3-5
Years
More than
5 Years
Payment Due by Period
Operating lease obligations
Capital lease obligations
Financing obligation - building in progress -
leased facility(1)
Other contractual commitments(2)
Total contractual obligations
$
$
174
337
1,222
3,185
$
16
—
752
977
31
—
86
33
38
73
438
94
299
311
$
563
$
503
$
1,142
1,452
$
209
$
446
$
359
$
(1) Financing obligation - building in progress - leased facility represents our commitment to lease an entire office building in London, United Kingdom, that is currently
under construction. As of December 31, 2015, $62 million of the total obligation was recorded as a liability and is included in other liabilities on our consolidated
balance sheets. See Note 10 of the accompanying notes to our consolidated financial statements for additional information related to this financing obligation.
(2) Other contractual commitments primarily relate to network infrastructure for our data center operations and, to a lesser extent, construction commitments related to
our data center sites.
In addition, our other liabilities include $2.46 billion related to uncertain tax positions as of December 31, 2015. Due to uncertainties
in the timing of the completion of tax audits, the timing of the resolution of these positions is uncertain and we are unable to make a
reasonably reliable estimate of the timing of payments in individual years beyond 12 months. As a result, this amount is not included in
the above contractual obligations table.
Contingencies
We are involved in claims, lawsuits, government investigations, and other legal proceedings. We record a provision for a liability
when we believe that it is both probable that a liability has been incurred, and that the amount can be reasonably estimated. Significant
judgment is required to determine both probability and the estimated amount. Such legal proceedings are inherently unpredictable and
subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or
prove to be incorrect, it could have a material impact on our results of operations, financial position, and cash flows.
See Note 10 of the accompanying notes to our consolidated financial statements included in Part II, Item 8, "Financial Statements
and Supplementary Data" and Part I, Item 3, "Legal Proceedings" of this Annual Report on Form 10-K for additional information regarding
these contingencies.
Recently Issued and Adopted Accounting Pronouncement
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from
Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. In
August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,
which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as
of the original effective date. As such, the updated standard will be effective for us in the first quarter of 2018, with the option to adopt
it in the first quarter of 2017. We are still evaluating the effect that the updated standard will have on our consolidated financial statements
and related disclosures.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes (ASU 2015-17), which simplifies the presentation of deferred income taxes by requiring deferred tax
assets and liabilities be classified as noncurrent on the balance sheet. The updated standard is effective for us beginning on January 1,
2017 with early application permitted as of the beginning of any interim or annual reporting period. We early adopted this standard
retrospectively, and reclassified our current deferred tax assets to noncurrent deferred tax assets for all periods presented. As a result of
the reclassifications, certain noncurrent deferred tax liabilities were netted with noncurrent deferred tax assets.
51
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, including changes to foreign currency exchange rates, interest rates, and inflation.
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar,
primarily the Euro. In general, we are a net receiver of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and
in particular a strengthening of the U.S. dollar, have negatively affected our revenue and other operating results as expressed in U.S.
dollars.
We have experienced and will continue to experience fluctuations in our net income as a result of transaction gains or losses related
to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of
the entities in which they are recorded. At this time we have not entered into, but in the future we may enter into, derivatives or other
financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the effect hedging activities would
have on our results of operations. We recognized foreign currency losses of $66 million, $87 million, and $14 million in 2015, 2014, and
2013, respectively.
Interest Rate Sensitivity
Our exposure to changes in interest rates relates primarily to interest earned and market value on our cash and cash equivalents,
and marketable securities.
Our cash and cash equivalents, and marketable securities consist of cash, certificates of deposit, time deposits, money market
funds, U.S. government securities, U.S. government agency securities, and corporate 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 have resulted in a decrease of $173 million and $63 million in the market value of our available-for-sale
debt securities as of December 31, 2015 and December 31, 2014, respectively. Any realized gains or losses resulting from such interest
rate changes would only occur if we sold the investments prior to maturity.
52
Item 8. Financial Statements and Supplementary Data
FACEBOOK, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm(cid:2)
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income(cid:2)
Consolidated Statements of Stockholders' Equity(cid:2)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
54
56
57
58
59
60
62
The supplementary financial information required by this Item 8, is included in Part II, Item 7 under the caption "Quarterly Results of
Operations Data," which is incorporated herein by reference.
5(cid:3)
The Board of Directors and Stockholders of Facebook, Inc.
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Facebook, Inc. as of December 31, 2015 and 2014, and the
related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Facebook, Inc. at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Facebook, Inc.'s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our
report dated January 28, 2016 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Francisco, California
January 28, 2016
54
The Board of Directors and Stockholders of Facebook, Inc.
Report of Independent Registered Public Accounting Firm
We have audited Facebook, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). Facebook, Inc.’s management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Facebook, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
2015 consolidated financial statements of Facebook, Inc. and our report dated January 28, 2016 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
San Francisco, California
January 28, 2016
55
FACEBOOK, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for number of shares and par value)
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net of allowances for doubtful accounts of $68 and $39 as of December 31,
2015 and December 31, 2014, respectively
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Other assets
Total assets
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
Partners payable
Accrued expenses and other current liabilities
Deferred revenue and deposits
Current portion of capital lease obligations
Total current liabilities
Capital lease obligations, less current portion
Other liabilities
Total liabilities
Commitments and contingencies
Stockholders' equity:
Common stock, $0.000006 par value; 5,000 million Class A shares authorized, 2,293 million and
2,234 million shares issued and outstanding, including 8 million and 13 million outstanding
shares subject to repurchase, as of December 31, 2015 and December 31, 2014, respectively;
4,141 million Class B shares authorized, 552 million and 563 million shares issued and
outstanding, including 3 million and 6 million outstanding shares subject to repurchase, as of
December 31, 2015 and December 31, 2014, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
See Accompanying Notes to Consolidated Financial Statements.
56
December 31,
2015
2014
$
4,907
$
13,527
2,559
659
21,652
5,687
3,246
18,026
796
4,315
6,884
1,678
513
13,390
3,967
3,929
17,981
699
$
$
49,407
$
39,966
$
196
217
1,449
56
7
1,925
107
3,157
5,189
176
202
866
66
114
1,424
119
2,327
3,870
—
34,886
(455)
9,787
44,218
$
49,407
$
—
30,225
(228)
6,099
36,096
39,966
FACEBOOK, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
Revenue
Costs and expenses:
Cost of revenue
Research and development
Marketing and sales
General and administrative
Total costs and expenses
Income from operations
Interest and other income/(expense), net
Income before provision for income taxes
Provision for income taxes
Net income
Less: Net income attributable to participating securities
Net income attributable to Class A and Class B common stockholders
Earnings per share attributable to Class A and Class B common
stockholders:
Basic
Diluted
Weighted average shares used to compute earnings per share attributable to
Class A and Class B common stockholders:
Basic
Diluted
Share-based compensation expense included in costs and expenses:
Cost of revenue
Research and development
Marketing and sales
General and administrative
Total share-based compensation expense
Year Ended December 31,
2015
2014
2013
$
17,928
$
12,466
$
7,872
2,867
4,816
2,725
1,295
11,703
6,225
(31)
6,194
2,506
3,688
19
3,669
1.31
1.29
2,803
2,853
$
$
$
$
2,153
2,666
1,680
973
7,472
4,994
(84)
4,910
1,970
2,940
15
2,925
1.12
1.10
2,614
2,664
$
$
$
$
81
$
62
$
2,350
320
218
1,328
249
198
2,969
$
1,837
$
$
$
$
$
$
$
1,875
1,415
997
781
5,068
2,804
(50)
2,754
1,254
1,500
9
1,491
0.62
0.60
2,420
2,517
42
604
133
127
906
See Accompanying Notes to Consolidated Financial Statements.
57
FACEBOOK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Net income
Other comprehensive income (loss):
Change in foreign currency translation adjustment, net of tax
Change in unrealized gain/loss on available-for-sale investments and other, net
of tax
Comprehensive income
Year Ended December 31,
2015
2014
2013
3,688
$
2,940
$
1,500
(202)
(239)
(25)
3,461
$
(3)
2,698
$
11
1
1,512
$
$
See Accompanying Notes to Consolidated Financial Statements.
58
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5
FACEBOOK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Year Ended December 31,
2014
2013
2015
$
3,688
$
2,940
$
1,500
Depreciation and amortization
Lease abandonment
Share-based compensation
Deferred income taxes
Tax benefit from share-based award activity
Excess tax benefit from share-based award activity
Other
Changes in assets and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Other assets
Accounts payable
Partners payable
Accrued expenses and other current liabilities
Deferred revenue and deposits
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities
Purchases of property and equipment
Purchases of marketable securities
Sales of marketable securities
Maturities of marketable securities
Acquisitions of businesses, net of cash acquired, and purchases of intangible
assets
Change in restricted cash and deposits
Other investing activities, net
Net cash used in investing activities
Cash flows from financing activities
Net proceeds from issuance of common stock
Taxes paid related to net share settlement
Proceeds from exercise of stock options
Repayment of long-term debt
Principal payments on capital lease obligations
Excess tax benefit from share-based award activity
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
1,945
—
2,960
(795)
1,721
(1,721)
17
(973)
(144)
(3)
18
17
513
(9)
1,365
8,599
(2,523)
(15,938)
6,928
2,310
(313)
102
—
(9,434)
—
(20)
—
—
(119)
1,721
1,582
(155)
592
4,315
4,907
$
$
1,243
(31)
1,786
(210)
1,853
(1,869)
7
(610)
(123)
(216)
31
(28)
328
10
346
5,457
(1,831)
(9,104)
8,438
1,909
(4,975)
(348)
(2)
(5,913)
—
(73)
18
—
(243)
1,869
1,571
(123)
992
3,323
4,315
$
1,011
117
906
(37)
602
(609)
56
(378)
355
(142)
26
12
(38)
8
833
4,222
(1,362)
(7,433)
2,988
3,563
(368)
(11)
(1)
(2,624)
1,478
(889)
26
(1,500)
(391)
609
(667)
8
939
2,384
3,323
See Accompanying Notes to Consolidated Financial Statements.
60
FACEBOOK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Supplemental cash flow data
Cash paid during the period for:
Interest
Income taxes
Cash received during the period for:
Income taxes
Non-cash investing and financing activities:
Net change in accounts payable, accrued expenses and other current
liabilities, and other liabilities related to property and equipment
additions
Property and equipment acquired under capital leases
Fair value of shares issued related to acquisitions of businesses
Promissory note payable issued in connection with an acquisition
Year Ended December 31,
2015
2014
2013
$
$
$
$
$
$
$
10
273
3
$
$
$
88
$
— $
— $
198
$
14
184
6
$
$
$
91
$
— $
14,344
$
— $
38
82
421
53
11
77
—
See Accompanying Notes to Consolidated Financial Statements.
61
FACEBOOK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Organization and Description of Business
Facebook was incorporated in Delaware in July 2004. Our mission is to give people the power to share and make the world more
open and connected. We generate substantially all of our revenue from advertising.
Basis of Presentation
We prepared the consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP). The
consolidated financial statements include the accounts of Facebook, Inc. and its wholly owned subsidiaries. All intercompany balances
and transactions have been eliminated.
Use of Estimates
Conformity with GAAP requires the use of estimates and judgments that affect the reported amounts in the consolidated financial
statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of our assets and
liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical information and on
various other assumptions that we believe are reasonable under the circumstances. GAAP requires us to make estimates and judgments
in several areas, including, but not limited to, those related to revenue recognition, collectability of accounts receivable, contingent
liabilities, fair value of financial instruments, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and
property and equipment, and income taxes. These estimates are based on management's knowledge about current events and expectations
about actions we may undertake in the future. Actual results could differ materially from those estimates.
Revenue Recognition
We recognize revenue once all of the following criteria have been met:
•
•
•
•
persuasive evidence of an arrangement exists;
delivery of our obligations to our customer has occurred;
the price is fixed or determinable; and
collectability of the related receivable is reasonably assured.
Revenue for the years ended December 31, 2015, 2014, and 2013 consists of the following (in millions):
Advertising
Payments and other fees
Total revenue
Advertising
Year Ended December 31,
2015
2014
2013
$
$
17,079
849
17,928
$
$
11,492
974
12,466
$
$
6,986
886
7,872
Advertising revenue is generated by displaying ad products on the Facebook properties, including our mobile applications, and
third-party affiliated websites or mobile applications. The arrangements are evidenced by either online acceptance of terms and conditions
or contracts that stipulate the types of advertising to be delivered, the timing and the pricing. Marketers pay for ad products either directly
or through their relationships with advertising agencies, based on the number of clicks made by our users, the number of actions taken
by our users, or the number of impressions delivered. The typical term of an advertising arrangement is less than one month with billing
generally occurring after the delivery of the advertisement.
We recognize revenue from the delivery of click-based ads in the period in which a user clicks on the content, and action-based
ads in the period in which a user takes the action the marketer contracted for. We recognize revenue from the display of impression-based
ads in the contracted period in which the impressions are delivered. Impressions are considered delivered when an ad is displayed to
users.
62
Payments and Other Fees
We enable Payments from people to purchase virtual and digital goods from our developers. People can transact and make payments
on the Facebook website by using debit cards and credit cards, PayPal, mobile phone payments, gift cards, or other methods.
When a person engages in a payment transaction for the purchase of a virtual or digital good from a developer, we remit to the
developer an amount that is based on the total amount of the transaction less the processing fee that we charge the developer. The price
of the purchase is an amount that is solely determined by the developer. Our revenue is the net amount of the transaction, representing
our processing fee for the service performed. We record revenue on a net basis as we do not consider ourselves to be the principal in the
sale of the virtual or digital good to the person. Additionally, we record all Payments revenue at the time of the purchase of the related
virtual goods, net of estimated refunds or chargebacks.
Other fees, which includes our ad serving and measurement products and the delivery of virtual reality platform devices, were not
material in all periods presented in our financial statements.
Revenue is recognized net of applicable sales and other taxes.
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, energy and bandwidth 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, amortization of intangible assets, costs associated with data partner
arrangements, and cost of virtual reality platform device inventory sold.
Share-based Compensation
We account for share-based employee compensation plans under the fair value recognition and measurement provisions of GAAP.
Those provisions require all share-based payments to employees, including grants of stock options and restricted stock units (RSUs), to
be measured based on the grant date fair value of the awards, with the resulting expense generally recognized on a straight-line basis in
our consolidated statements of income over the period during which the employee is required to perform service in exchange for the
award. The majority of our awards are earned over a service period of four years.
Share-based compensation expense is recorded net of estimated forfeitures in our consolidated statements of income and as such,
only those share-based awards that we expect to vest are recorded. We estimate the forfeiture rate based on historical forfeitures of equity
awards and adjust the rate to reflect changes in facts and circumstances, if any. We will revise our estimated forfeiture rate if actual
forfeitures differ from our initial estimates.
We have historically issued unvested restricted shares to employee stockholders of certain acquired companies. As these awards
are generally subject to continued post-acquisition employment, we have accounted for them as post-acquisition share-based compensation
expense. We recognize compensation expense equal to the grant date fair value of the common stock on a straight-line basis over the
period during which the employee is required to perform service in exchange for the award.
During the years ended December 31, 2015, 2014, and 2013, we realized tax benefits from share-based award activity of $1.72
billion, $1.85 billion, and $602 million, respectively. These amounts reflect the extent that the total reduction to our income tax liability
from share-based award activity was greater than the amount of the deferred tax assets that we had previously recorded in anticipation
of these benefits. These amounts are the aggregate of the individual transactions in which the reduction to our income tax liability was
greater than the deferred tax assets that we recorded, reduced by any individual transactions in which the reduction to our income tax
liability was less than the deferred tax assets that were recorded. These net amounts were recorded as an adjustment to stockholders'
equity in each period, as an increase to cash flows from operating activities, and were not recognized in our consolidated statements of
income.
In addition, we reported excess tax benefits that decreased our cash flows from operating activities and increased our cash flows
from financing activities for the years ended December 31, 2015, 2014, and 2013, by $1.72 billion, $1.87 billion, and $609 million,
respectively. The amounts of these excess tax benefits reflect the total of the individual transactions in which the reduction to our income
tax liability was greater than the deferred tax assets that were recorded, but were not reduced by any of the individual transactions in
which the reduction to our income tax liability was less than the deferred tax assets that were recorded.
Income Taxes
We recognize income taxes under the asset and liability method. We recognize deferred income tax assets and liabilities for the
expected future consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. These
differences are measured using the enacted statutory tax rates that are expected to apply to taxable income for the years in which differences
63
are expected to reverse. We recognize the effect on deferred income taxes of a change in tax rates in income in the period that includes
the enactment date.
We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be
realized. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks
associated with estimates of future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance.
We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will
be sustained on examination by the taxing authorities based on the technical merits of the position. We make adjustments to these reserves
when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. The provision for income taxes
includes the effects of any reserves that are considered appropriate, as well as the related net interest and penalties.
Advertising Expense
Advertising costs are expensed when incurred and are included in marketing and sales expenses in the accompanying consolidated
statements of income. We incurred advertising expenses of $281 million, $135 million, and $117 million for the years ended December 31,
2015, 2014, and 2013, respectively.
Cash and Cash Equivalents, and Marketable Securities
Cash and cash equivalents primarily consist of cash on deposit with banks and investments in money market funds with maturities
of 90 days or less from the date of purchase.
We hold investments in marketable securities, consisting of U.S. government securities, U.S. government agency securities, and
corporate debt securities. We classify our marketable securities as available-for-sale investments in our current assets because they
represent investments of cash available for current operations. Our available-for-sale investments are carried at estimated fair value with
any unrealized gains and losses, net of taxes, included in accumulated other comprehensive (loss) income in stockholders' equity.
Unrealized losses are charged against interest and other income/(expense), net when a decline in fair value is determined to be other-
than-temporary. We have not recorded any such impairment charge in the periods presented. We determine realized gains or losses on
sale of marketable securities on a specific identification method, and record such gains or losses as interest and other income/(expense),
net.
We classify certain restricted cash balances within prepaid expenses and other current assets and other assets on the accompanying
consolidated balance sheets based upon the term of the remaining restrictions.
Fair Value of Financial Instruments
We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or
disclosed at fair value in the financial statements on a recurring basis. We define fair value as the price that would be received from selling
an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining
the fair value measurements for assets and liabilities, which are required to be recorded at fair value, we consider the principal or most
advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would
use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated
by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization
within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1-Quoted prices in active markets for identical assets or liabilities.
Level 2-Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical
or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data
for substantially the full term of the assets or liabilities.
Level 3-Inputs that are generally unobservable and typically reflect management's estimate of assumptions that market participants
would use in pricing the asset or liability.
Our valuation techniques used to measure the fair value of money market funds and marketable debt securities were derived from
quoted market prices or alternative pricing sources and models utilizing market observable inputs. Our valuation technique used to
measure the fair value of our contingent consideration liability was based on the present value of probability-weighted future cash flows
related to the contingent earn-out criteria and the fair value of our common stock on each reporting date.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible
amounts. We make estimates for the allowance for doubtful accounts based upon our assessment of various factors, including historical
64
experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, and other factors
that may affect customers' ability to pay.
Property and Equipment
Property and equipment, which includes amounts recorded under capital leases, are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the remaining lease term, in the
case of a capital lease, whichever is shorter.
The estimated useful lives of property and equipment are described below:
Property and Equipment
Network equipment
Buildings
Computer software, office equipment and other Three to five years
Leased equipment and leasehold improvements Lesser of estimated useful life or remaining lease term
Useful Life
Three to five years
Three to 30 years
Land and assets held within construction in progress are not depreciated. Construction in progress is related to the construction or
development of property and equipment that have not yet been placed in service for their intended use.
The cost of maintenance and repairs is expensed as incurred. When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from their respective accounts, and any gain or loss on such sale or disposal is reflected in income
from operations.
Lease Obligations
We lease office space, data centers, and equipment under non-cancelable capital and operating leases with various expiration dates
through 2032. Certain of the operating lease agreements contain rent holidays, rent escalation provisions, and purchase options. Rent
holidays and rent escalation provisions are considered in determining the straight-line rent expense to be recorded over the lease term.
The lease term begins on the date of initial possession of the leased property for purposes of recognizing lease expense on a straight-line
basis over the term of the lease. We do not assume renewals in our determination of the lease term unless the renewals are deemed to be
reasonably assured at lease inception.
We record assets and liabilities for the estimated construction costs incurred by third parties under build-to-suit lease arrangements
to the extent that we are involved in the construction of structural improvements or bear construction risk prior to commencement of a
lease.
Loss Contingencies
We are involved in various lawsuits, claims, investigations, and proceedings that arise in the ordinary course of business. We record
a liability when we believe that it is both probable that a loss has been incurred and the amount can be reasonably estimated. Significant
judgment is required to determine both probability and the estimated amount. We review these provisions at least quarterly and adjust
these provisions accordingly to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information.
Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired
based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets
and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially
with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected
cash flows from acquired users, acquired technology, and trade names from a market participant perspective, useful lives and discount
rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain
and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is one year from the
acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.
Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Long-Lived Assets, Including Goodwill and Other Acquired Intangible Assets
We evaluate the recoverability of property and equipment and finite-lived intangible assets for possible impairment whenever
events or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest
level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these
assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If
65
such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable, the carrying amount
of such assets is reduced to fair value. We have not recorded any significant impairment charges during the years presented.
We review goodwill for impairment at least annually or more frequently if events or changes in circumstances would more likely
than not reduce the fair value of our single reporting unit below its carrying value. We evaluate indefinite-lived intangible assets for
impairment annually or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is
impaired. As of December 31, 2015, no impairment of goodwill or indefinite-lived intangible assets has been identified.
Acquired indefinite-lived intangible assets related to our in-process research and development (IPR&D) are capitalized and subject
to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, we will make a
separate determination of useful life of the acquired indefinite-lived intangible assets and the related amortization will be recorded as an
expense over the estimated useful life of the specific projects.
Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets. We
routinely review the remaining estimated useful lives of property and equipment and finite-lived intangible assets. If we reduce the
estimated useful life assumption for any asset, the remaining unamortized balance would be amortized or depreciated over the revised
estimated useful life.
Deferred Revenue and Deposits
Deferred revenue consists of billings in advance of revenue recognition. Deposits relate to unused balances held on behalf of our
users. Once this balance is utilized by a user, approximately 70% of this amount would then be payable to the developer and the balance
would be recognized as revenue.
Deferred revenue and deposits consists of the following (in millions):
Deferred revenue
Deposits
Total deferred revenue and deposits
Foreign Currency
December 31,
2015
2014
$
$
28
28
56
$
$
38
28
66
Generally the functional currency of our international subsidiaries is the local currency. We translate the financial statements of
these subsidiaries to U.S. dollars using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenue,
costs, and expenses. Translation gains and losses are recorded in accumulated other comprehensive (loss) income as a component of
stockholders' equity. As of December 31, 2015 and 2014, we had a cumulative translation loss, net of tax of $430 million and $227 million,
respectively. Net losses resulting from foreign exchange transactions were $66 million, $87 million, and $14 million for the years ended
December 31, 2015, 2014, and 2013, respectively. These losses were recorded as interest and other income/(expense), net in our
consolidated statements of income.
Credit Risk and Concentration
Our financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash, cash equivalents,
restricted cash, marketable securities, and accounts receivable. Cash equivalents consist of short-term money market funds, which are
managed by reputable financial institutions. Marketable securities consist of investments in U.S. government securities, U.S. government
agency securities, and corporate debt securities. Our investment policy limits investment instruments to U.S. government securities, U.S.
government agency securities, and corporate debt securities with the main objective of preserving capital and maintaining liquidity.
Accounts receivable are typically unsecured and are derived from revenue earned from customers across different industries and
countries. We generated 47%, 45%, and 46% of our revenue for the years ended December 31, 2015, 2014, and 2013, respectively, from
marketers and developers based in the United States, with the majority of revenue outside of the United States coming from customers
located in western Europe, China, Brazil, Canada, and Australia.
We perform ongoing credit evaluations of our customers, and generally do not require collateral. We maintain an allowance for
estimated credit losses. During the years ended December 31, 2015, 2014, and 2013, our bad debt expenses were $44 million, $19 million,
and $21 million, respectively. In the event that accounts receivable collection cycles deteriorate, our operating results and financial position
could be adversely affected.
No customer represented 10% or more of total revenue during the years ended December 31, 2015, 2014, and 2013.
66
Segments
Our chief operating decision-maker is our Chief Executive Officer who makes resource allocation decisions and assesses
performance based on financial information presented on a consolidated basis. There are no segment managers who are held accountable
by the chief operating decision-maker, or anyone else, for operations, operating results, and planning for levels or components below the
consolidated unit level. Accordingly, we have determined that we have a single reportable segment and operating unit structure.
Recently Issued and Adopted Accounting Pronouncement
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from
Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. In
August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,
which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as
of the original effective date. As such, the updated standard will be effective for us in the first quarter of 2018, with the option to adopt
it in the first quarter of 2017. We are still evaluating the effect that the updated standard will have on our consolidated financial statements
and related disclosures.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes (ASU 2015-17), which simplifies the presentation of deferred income taxes by requiring deferred tax
assets and liabilities be classified as noncurrent on the balance sheet. The updated standard is effective for us beginning on January 1,
2017 with early application permitted as of the beginning of any interim or annual reporting period. We early adopted this standard
retrospectively, and reclassified $280 million of our current deferred tax assets to noncurrent deferred tax assets as of December 31, 2014.
This resulted in net adjustments of $62 million increase and $218 million decrease to our noncurrent deferred tax assets and noncurrent
deferred tax liability, respectively, on our December 31, 2014 consolidated balance sheet.
Note 2. Acquisitions
During the year ended December 31, 2015, we completed several business acquisitions for total consideration of $488 million,
primarily related to a business combination involving land and buildings adjacent to our headquarters in Menlo Park. Included in this
amount is a $198 million promissory note payable issued in connection with this particular acquisition. This promissory note payable is
classified under accrued expenses and other current liabilities in our consolidated balance sheets. These acquisitions were not material
to our consolidated financial statements, either individually or in the aggregate. Accordingly, pro forma historical results of operations
related to these business acquisitions during the year ended December 31, 2015 have not been presented. We have included the financial
results of these business acquisitions in our consolidated financial statements from their respective dates of acquisition.
The following table summarizes the allocation of the total consideration transferred during the year ended December 31, 2015,
including the related estimated useful lives, where applicable:
Finite-lived intangible assets:
Acquired technology
Other
Land acquired
Other net tangible assets acquired
Deferred tax assets, net
Net assets acquired
Goodwill
Total fair value consideration
(in millions)
Useful lives (in years)
$
$
$
3
3
30
5
379
12
17
443
45
488
Goodwill generated from all business acquisitions completed during the year ended December 31, 2015 is primarily attributable
to expected synergies from future growth and potential monetization opportunities. The amount of goodwill generated during this period
that is deductible for tax purposes is not material.
Note 3. Earnings per Share
We compute earnings per share (EPS) of Class A and Class B common stock using the two-class method required for participating
securities. We consider restricted stock awards to be participating securities because holders of such shares have non-forfeitable dividend
rights in the event of our declaration of a dividend for common shares.
Undistributed earnings allocated to participating securities are subtracted from net income in determining net income attributable
67
to common stockholders. Basic EPS is computed by dividing net income attributable to common stockholders by the weighted-average
number of shares of our Class A and Class B common stock outstanding, adjusted for outstanding shares that are subject to repurchase.
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 and inducement awards under separate non-plan RSU award
agreements. In addition, the computation of the diluted EPS of Class A common stock assumes the conversion of our Class B common
stock to Class A common stock, while the diluted EPS of Class B common stock does not assume the conversion of those shares to Class
A common stock. Diluted EPS attributable to common stockholders is computed by dividing the resulting net income attributable to
common stockholders by the weighted-average number of fully diluted common shares outstanding.
Basic and dilutive securities in our basic and diluted EPS calculation for the year ended December 31, 2015 and 2014 do not
include contingent earn-out shares. Issuance of these earn-out shares is dependent upon the completion of certain milestones. These
milestones have not been met as of December 31, 2015 and accordingly, these shares have been excluded from the effect of basic and
dilutive securities.
The RSUs excluded from the EPS calculation because the impact would be anti-dilutive, were not material for the years ended
December 31, 2015, 2014, and 2013, respectively.
Basic and diluted EPS are the same for each class of common stock because they are entitled to the same liquidation and dividend
rights.
68
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):
Basic EPS:
Numerator
Net income
Less: Net income attributable to participating securities
Net income attributable to common stockholders
Denominator
Weighted average shares outstanding
Less: Shares subject to repurchase
Number of shares used for basic EPS computation
Basic EPS
Diluted EPS:
Numerator
Year Ended December 31,
2015
2014
2013
Class
A
Class
B
Class
A
Class
B
Class
A
Class
B
$ 2,959
15
$ 2,944
$
$
729
$ 2,308
4
12
725
$ 2,296
$
$
632
$ 1,114
3
7
629
$ 1,107
$
$
2,259
10
2,249
559
5
554
2,059
6
2,053
568
7
561
1,803
5
1,798
386
2
384
631
9
622
$
1.31
$
1.31
$
1.12
$
1.12
$
0.62
$
0.62
Net income attributable to common stockholders
$ 2,944
$
725
$ 2,296
$
629
$ 1,107
$
384
Reallocation of net income attributable to participating
securities
Reallocation of net income as a result of conversion of Class
B to Class A common stock
Reallocation of net income to Class B common stock
Net income attributable to common stockholders for
diluted EPS
Denominator
Number of shares used for basic EPS computation
Conversion of Class B to Class A common stock
Weighted average effect of dilutive securities:
Employee stock options
RSUs
Shares subject to repurchase
19
725
—
—
—
15
15
629
—
—
—
23
9
384
—
—
—
39
$ 3,688
$
740
$ 2,940
$
652
$ 1,500
$
423
2,249
554
554
—
2,053
561
8
37
5
8
9
2
13
30
7
561
—
13
13
4
1,798
622
65
25
7
622
—
65
15
7
709
Number of shares used for diluted EPS computation
2,853
573
2,664
591
2,517
Diluted EPS
$
1.29
$
1.29
$
1.10
$
1.10
$
0.60
$
0.60
69
Note 4. Cash and Cash Equivalents, and Marketable Securities
The following table sets forth the cash and cash equivalents, and marketable securities (in millions):
Cash and cash equivalents:
Cash
Money market funds
U.S. government securities
U.S. government agency securities
Corporate debt securities
Total cash and cash equivalents
Marketable securities:
U.S. government securities
U.S. government agency securities
Corporate debt securities
Total marketable securities
December 31,
2015
2014
$
1,703
$
2,409
597
145
53
4,907
5,948
4,475
3,104
13,527
Total cash and cash equivalents, and marketable securities
$
18,434
$
2,162
2,153
—
—
—
4,315
2,830
2,710
1,344
6,884
11,199
The gross unrealized gains or losses on our marketable securities as of December 31, 2015 and 2014 were not significant. In
addition, the gross unrealized loss that had been in a continuous loss position for 12 months or longer was not significant as of December 31,
2015. There was no such loss as of December 31, 2014. As of December 31, 2015, we considered the decreases in market value on our
marketable securities to be temporary in nature and did not consider any of our investments to be other-than-temporarily impaired.
The following table classifies our marketable securities by contractual maturities (in millions):
Due in one year
Due in one to two years
Total
December 31,
2015
2014
$
$
5,029
8,498
13,527
$
$
3,422
3,462
6,884
70
Note 5. Fair Value Measurement
The following table summarizes, for assets or liabilities measured at fair value, the respective fair value and the classification by
level of input within the fair value hierarchy (in millions):
Description
Cash equivalents:
Money market funds
U.S. government securities
U.S. government agency securities
Corporate debt securities
Marketable securities:
U.S. government securities
U.S. government agency securities
Corporate debt securities
Total cash equivalents and marketable securities
Other liabilities:
Contingent consideration liability
$
$
Description
Cash equivalents:
Money market funds
Marketable securities:
U.S. government securities
U.S. government agency securities
Corporate debt securities
Total cash equivalents and marketable securities
Other liabilities:
Contingent consideration liability
Fair Value Measurement at
Reporting Date Using
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
December 31,
2015
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
2,409
$
2,409
$
— $
597
145
53
5,948
4,475
3,104
597
145
—
5,948
4,475
—
—
—
53
—
—
3,104
16,731
$
13,574
$
3,157
$
260
$
— $
— $
260
Fair Value Measurement at
Reporting Date Using
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
December 31,
2014
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3
$
2,153
$
2,153
$
— $
2,830
2,710
1,344
9,037
$
2,830
2,710
—
7,693
$
—
—
1,344
1,344
$
$
$
191
$
— $
— $
191
—
—
—
—
—
—
—
—
—
—
—
—
—
We classify our cash equivalents and marketable securities within Level 1 or Level 2 because we use quoted market prices or
alternative pricing sources and models utilizing market observable inputs to determine their fair value.
We classify our contingent consideration liability in connection with an acquisition in 2014 within Level 3 as factors used to
develop the estimated fair value are unobservable inputs that are not supported by market activity. We estimate the fair value of our
contingent consideration liability based on the present value of probability-weighted future cash flows related to the contingent earn-out
criteria and the fair value of our common stock on each reporting date. Changes in the fair value of the contingent consideration liability
subsequent to the acquisition date, such as changes in the probability assessment and the fair value of our common stock, are recognized
in earnings in the period when the change in the estimated fair value occurs. During the year ended December 31, 2015, we recognized
an increase in the fair value of our contingent liability of $69 million, in research and development expense in our consolidated statements
of income, primarily due to an increase in the fair value of our common stock.
71
Note 6. Property and Equipment
Property and equipment consists of the following (in millions):
Land
Buildings
Leasehold improvements
Network equipment
Computer software, office equipment and other
Construction in progress
Total
Less: Accumulated depreciation
Property and equipment, net
December 31,
2015
2014
$
596
$
2,273
447
3,633
248
622
7,819
(2,132)
5,687
$
$
153
1,420
304
3,020
149
738
5,784
(1,817)
3,967
Depreciation expense on property and equipment was $1.22 billion, $923 million, and $857 million during 2015, 2014, and 2013,
respectively.
Property and equipment at December 31, 2015 and 2014 includes $287 million and $700 million, respectively, acquired under
capital lease agreements, of which the majority is included in network equipment. Accumulated depreciation of property and equipment
acquired under these capital leases was $71 million and $425 million at December 31, 2015 and 2014, respectively.
Construction in progress includes costs primarily related to construction of data centers and office buildings, and network equipment
infrastructure to support our data centers around the world. The construction of office buildings includes the leased office space in London,
United Kingdom for which we are considered to be the owner for accounting purposes. See Note 10 in these notes to the consolidated
financial statements for additional information. No interest was capitalized during the years ended December 31, 2015 and 2014. Interest
capitalized during the year ended December 31, 2013 was not material.
Note 7. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the years ended December 31, 2015 and 2014 are as follows (in millions):
Balance as of December 31, 2013
Goodwill acquired
Effect of currency translation adjustment
Balance as of December 31, 2014
Goodwill acquired
Balance as of December 31, 2015
$
$
$
839
17,150
(8)
17,981
45
18,026
72
Intangible assets consist of the following (in millions):
December 31, 2015
December 31, 2014
Weighted-
Average
Remaining
Useful Lives
(in years)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
5.7
3.3
6.5
4.1
3.5
5.2
$
2,056
$
831
785
629
162
$
4,463
$
(382) $
(310)
(333)
(163)
(89)
(1,277) $
1,674
$
2,056
$
521
452
466
73
813
773
632
164
3,186
$
4,438
$
(85) $
(144)
(239)
(46)
(55)
(569) $
1,971
669
534
586
109
3,869
$
$
60
4,523
$
$
— $
60
(1,277) $
3,246
$
$
60
4,498
$
$
— $
60
(569) $
3,929
Finite-lived intangible assets:
Acquired users
Acquired technology
Acquired patents
Trade names
Other
Total finite-lived intangible assets
Indefinite-lived intangible assets:
In-process research and
development (IPR&D)
Total intangible assets
As of December 31, 2015, technological feasibility has not been established for our IPR&D intangible assets. They have no
alternative future use and, as such, continue to be accounted for as indefinite-lived intangible assets.
Amortization expense of intangible assets for the years ended December 31, 2015, 2014, and 2013 was $730 million, $319 million,
and $145 million, respectively.
As of December 31, 2015, expected amortization expense for the unamortized acquired intangible assets for the next five years
and thereafter is as follows (in millions):
2016
2017
2018
2019
2020
Thereafter
Total
Note 8. Liabilities
$
701
658
603
520
357
347
$
3,186
The components of accrued expenses and other current liabilities are as follows (in millions):
Accrued compensation and benefits
Accrued property and equipment
Promissory note payable(1)
Other current liabilities
Accrued expenses and other current liabilities
December 31,
2015
2014
$
$
$
473
192
201
583
1,449
$
322
164
—
380
866
(1) See Note 2 in these notes to the consolidated financial statements for additional information related to our promissory note payable.
73
The components of other liabilities are as follows (in millions):
Income tax payable
Deferred tax liabilities(1)
Contingent consideration liability
Other liabilities
Other liabilities
December 31,
2015
2014
2,458
$
1,190
163
267
269
769
193
175
3,157
$
2,327
$
$
(1)
In November 2015, the FASB issued ASU 2015-17, which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities
be classified as noncurrent on the balance sheet. We early adopted this standard retrospectively, and as a result of the reclassifications, certain noncurrent
deferred tax liabilities were netted with noncurrent deferred tax assets. See Note 1 in these notes to the consolidated financial statements for additional
information.
Note 9. Long-term Debt
In August 2013, we entered into a five-year senior unsecured revolving credit facility (2013 Revolving Credit Facility) that allows
us to borrow up to $6.5 billion to fund working capital and general corporate purposes with interest payable on the borrowed amounts
set at LIBOR plus 1.0%, as well as an annual commitment fee of 0.10% on the daily undrawn balance of the facility. We paid origination
fees at closing of the 2013 Revolving Credit Facility, which fees are being amortized over the term of the facility. Any amounts outstanding
under this facility will be due and payable on August 15, 2018. As of December 31, 2015, no amounts had been drawn down and we
were in compliance with the covenants under this facility.
Note 10. Commitments and Contingencies
Commitments
Leases
We entered into various capital lease arrangements to obtain property and equipment for our operations. Additionally, on
occasion we have purchased property and equipment for which we have subsequently obtained capital financing under sale-leaseback
transactions. These agreements are typically for three years, except for a building lease which is for 15 years, with interest rates
ranging from 1% to 13%. The leases are secured by the underlying leased buildings, leasehold improvements, and equipment. We
have also entered into various non-cancelable operating lease agreements for certain of our offices, equipment, land, and data centers
with original lease periods expiring between 2016 and 2032. We are committed to pay a portion of the related actual operating expenses
under certain of these lease agreements. Certain of these arrangements have free rent periods or escalating rent payment provisions,
and we recognize rent expense under such arrangements on a straight-line basis.
The following is a schedule, by years, of the future minimum lease payments required under non-cancelable capital and operating
leases as of December 31, 2015 (in millions):
2016
2017
2018
2019
2020
Thereafter
Total minimum lease payments
Less: amount representing interest and taxes
Less: current portion of the present value of minimum lease payments
Capital lease obligations, net of current portion
Capital
Leases
Operating
Leases
Financing obligation,
building in progress -
leased facility(1)
$
$
$
$
$
209
230
216
200
159
438
$
1,452
$
16
15
16
16
17
94
174
(60)
(7)
107
—
—
—
13
25
299
337
(1)
In 2015, we entered into an agreement to lease an entire office building in London, United Kingdom, that is currently under construction. As a result of our
involvement during the construction period, we are considered to be the owner of the construction project for accounting purposes. The above financing obligation,
building in progress - leased facility represents the total expected financing and lease obligation associated with this lease and will be settled through monthly
74
lease payments to the landlord when we occupy the office space upon completion. This amount includes $62 million that is included in property and equipment,
net and other liabilities on our consolidated balance sheets as of December 31, 2015.
Operating lease expense was $181 million, $125 million, and $130 million for the years ended December 31, 2015, 2014 and
2013, respectively.
Other contractual commitments
We also have $1.22 billion of non-cancelable contractual commitments as of December 31, 2015, primarily related to network
infrastructure for our data center operations and, to a lesser extent, construction of our data center sites. The majority of these
commitments are due within five years.
Contingencies
Legal Matters
Beginning on May 22, 2012, multiple putative class actions, derivative actions, and individual actions were filed in state and
federal courts in the United States and in other jurisdictions against us, our directors, and/or certain of our officers alleging violation
of securities laws or breach of fiduciary duties in connection with our initial public offering (IPO) and seeking unspecified damages.
We believe these lawsuits are without merit, and we intend to continue to vigorously defend them. The vast majority of the cases in
the United States, along with multiple cases filed against The NASDAQ OMX Group, Inc. and The Nasdaq Stock Market LLC
(collectively referred to herein as NASDAQ) alleging technical and other trading-related errors by NASDAQ in connection with our
IPO, were ordered centralized for coordinated or consolidated pre-trial proceedings in the U.S. District Court for the Southern District
of New York. In a series of rulings in 2013 and 2014, the court denied our motion to dismiss the consolidated securities class action
and granted our motions to dismiss the derivative actions against our directors and certain of our officers. On July 24, 2015, the court
of appeals affirmed the dismissal of the derivative actions. On December 11, 2015, the court granted plaintiffs' motion for class
certification in the consolidated securities action. In addition, the events surrounding our IPO became the subject of various state and
federal government inquiries. In May 2014, the Securities and Exchange Commission (SEC) notified us that it had terminated its
inquiry and that no enforcement action had been recommended by the SEC.
We are also party to various legal proceedings and claims that arise in the ordinary course of business. With respect to our
outstanding legal matters, we believe that the amount or estimable range of reasonably possible loss will not, either individually or
in the aggregate, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.
However, the outcome of litigation is inherently uncertain. Therefore, if one or more of these legal matters were resolved against us
for amounts in excess of management's expectations, our results of operations and financial condition, including in a particular reporting
period, could be materially adversely affected.
Indemnifications
In the normal course of business, to facilitate transactions of services and products, we have agreed to indemnify certain parties
with respect to certain matters. We have agreed to hold certain parties harmless against losses arising from a breach of representations
or covenants, or out of intellectual property infringement or other claims made by third parties. These agreements may limit the time
within which an indemnification claim can be made and the amount of the claim. In addition, we have entered into indemnification
agreements with our officers, directors, and certain employees, and our certificate of incorporation and bylaws contain similar
indemnification obligations.
It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history
of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments
made by us under these agreements have not had a material impact on our consolidated financial position, results of operations or
cash flows. In our opinion, as of December 31, 2015, there was not at least a reasonable possibility we had incurred a material loss
with respect to indemnification of such parties. We have not recorded any liability for costs related to indemnification through
December 31, 2015.
Note 11. Stockholders' Equity
Follow-on Offering
In December 2013, we completed a follow-on offering in which we issued and sold 27 million shares of Class A common stock
at a public offering price of $55.05 per share and the selling stockholders sold 43 million shares of Class A common stock. We did
not receive any proceeds from the sale of shares by the selling stockholders. The total net proceeds received from the follow-on
offering were $1.48 billion after deducting underwriting discounts and commissions of $7 million and other offering expenses of
approximately $1 million.
75
Common Stock
Our certificate of incorporation authorizes the issuance of Class A common stock and Class B common stock. As of
December 31, 2015, we are authorized to issue 5,000 million shares of Class A common stock and 4,141 million shares of Class B
common stock, each with a par value of $0.000006 per share. Holders of our Class A common stock and Class B common stock are
entitled to dividends when, as and if, declared by our board of directors, subject to the rights of the holders of all classes of stock
outstanding having priority rights to dividends. As of December 31, 2015, we did not declare any dividends and our credit facility
contains restrictions on our ability to pay dividends. The holder of each share of Class A common stock is entitled to one vote, while
the holder of each share of Class B common stock is entitled to ten votes. Shares of our Class B common stock are convertible into
an equivalent number of shares of our Class A common stock and generally convert into shares of our Class A common stock upon
transfer. Class A common stock and Class B common stock are referred to as common stock throughout the notes to these financial
statements, unless otherwise noted.
As of December 31, 2015, there were 2,293 million shares and 552 million shares of Class A common stock and Class B
common stock, respectively, issued and outstanding.
Share-based Compensation Plans
We maintain two share-based employee compensation plans: the 2012 Equity Incentive Plan (2012 Plan) and the 2005 Stock
Plan (collectively, Stock Plans). Our 2012 Plan serves as the successor to our 2005 Stock Plan and provides for the issuance of incentive
and nonstatutory stock options, restricted stock awards, stock appreciation rights, RSUs, performance shares and stock bonuses to
qualified employees, directors and consultants. Outstanding awards under the 2005 Stock Plan continue to be subject to the terms and
conditions of the 2005 Stock Plan.
We initially reserved 25 million shares of our Class A common stock for issuance under our 2012 Plan. The number of shares
reserved for issuance under our 2012 Plan increases 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 the lesser of (i) 2.5% of the total outstanding shares of our common stock as of
the immediately preceding December 31st or (ii) a number of shares determined by the board of directors. Our board of directors
elected not to increase the number of shares reserved for issuance in 2015 and 2014. In addition, shares available for grant under the
2005 Stock Plan, which were reserved but not issued, forfeited or repurchased at their original issue price, or subject to outstanding
awards under the 2005 Stock Plan as of the effective date of our IPO, were added to the reserves of the 2012 Plan and shares that are
withheld in connection with the net settlement of RSUs are also added to the reserves of the 2012 Plan. In January 2014, we began
requiring that employees sell a portion of the shares that they receive upon the vesting of RSUs in order to cover any required
withholding taxes, rather than our previous approach of net share settlement. 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 board of directors or a committee thereof.
In connection with an acquisition in 2014, we granted inducement awards covering an aggregate of 37 million RSUs earned
over a service period of four years. These awards are excluded from the Stock Plans and are subject to the terms, restrictions, and
conditions of separate non-plan RSU award agreements.
The following table summarizes the activities of stock option awards under the Stock Plans for the year ended December 31,
2015:
Balance as of December 31, 2014
Stock options exercised
Balance as of December 31, 2015
Stock options vested and expected to vest as of December 31, 2015
Stock options exercisable as of December 31, 2015
Shares Subject to Options Outstanding
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
(1)
Value
(in years)
(in millions)
4.78
0.48
7.10
7.10
5.19
3.7
3.7
$
$
3.3 $
824
824
622
Number of
Shares
(in thousands)
12,984
(4,541)
8,443
8,441
6,250
$
$
$
$
(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the official closing price of our
Class A common stock, as reported on the NASDAQ Global Select Market, of $104.66 on December 31, 2015.
76
There were no options granted, forfeited, or canceled for the year ended December 31, 2015. The aggregate intrinsic value of
the options exercised in the years ended December 31, 2015, 2014, and 2013 was $403 million, $624 million, and $4.58 billion,
respectively. The total grant date fair value of stock options vested during the years ended December 31, 2015, 2014, and 2013 was
$5 million, $7 million, and $7 million, respectively.
The following table summarizes additional information regarding outstanding and exercisable options under the Stock Plans
at December 31, 2015:
Exercise
Price (Range)
$0.10 - 0.18
0.29 - 0.33
1.85
2.95
10.39
15.00
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Term
(in years)
Weighted
Average
Exercise
Price
0.6
1.5
3.0
3.6
4.6
4.8
3.7
$
$
0.11
0.32
1.85
2.95
10.39
15.00
7.10
Number of
Shares
(in thousands)
446
$
1,182
968
1,147
2,334
173
6,250
$
Weighted
Average
Exercise
Price
0.11
0.32
1.85
2.95
10.39
15.00
5.19
Number of
Shares
(in thousands)
446
1,182
968
1,147
3,500
1,200
8,443
The following table summarizes the activities for our unvested RSUs for the year ended December 31, 2015:
Unvested at December 31, 2014
Granted
Vested
Forfeited
Unvested at December 31, 2015
Unvested RSUs(1)
Number of Shares
(in thousands)
Weighted Average Grant
Date Fair Value
138,055
31,507
(46,434)
(6,719)
116,409
$
$
55.89
82.15
49.19
51.19
65.95
(1) Unvested shares include inducement awards issued in connection with an acquisition in 2014 and are subject to the terms, restrictions, and conditions of separate
non-plan RSU award agreements.
The fair value as of the respective vesting dates of RSUs that vested during the years ended December 31, 2015, 2014, and
2013 was $4.23 billion, $2.77 billion, and $1.55 billion, respectively.
As of December 31, 2015, there was $7.23 billion of unrecognized share-based compensation expense, of which $6.67 billion
is related to RSUs and $559 million is related to restricted shares, shares with performance conditions related to our contingent
consideration, and stock options. This unrecognized compensation expense is expected to be recognized over a weighted-average
period of approximately three years.
77
Note 12. Interest and other income/(expense), net
The following table presents the detail of interest and other income/(expense), net, for the periods presented (in millions):
Interest expense
Interest income
Foreign currency exchange losses, net
Other
Interest and other income/(expense), net
Note 13. Income Taxes
Year Ended December 31,
2015
2014
2013
$
$
(23) $
52
(66)
6
(31) $
(23) $
27
(87)
(1)
(84) $
(56)
19
(14)
1
(50)
The components of income before provision for income taxes for the years ended December 31, 2015, 2014, and 2013 are as
follows (in millions):
Domestic
Foreign
Income before provision for income taxes
The provision for income taxes consisted of the following (in millions):
Current:
Federal
State
Foreign
Total current tax expense
Deferred:
Federal
State
Foreign
Total deferred tax benefit
Provision for income taxes
Year Ended December 31,
2015
2014
2013
2,802
3,392
6,194
$
$
4,918
(8)
4,910
$
$
3,197
(443)
2,754
Year Ended December 31,
2015
2014
2013
3,012
183
123
3,318
(800)
(17)
5
(812)
2,506
$
$
1,999
130
96
2,225
(240)
(14)
(1)
(255)
1,970
$
$
1,154
69
68
1,291
(28)
(7)
(2)
(37)
1,254
$
$
$
$
A reconciliation of the U.S. federal statutory income tax rate of 35.0% to our effective tax rate is as follows (in percentages):
U.S. federal statutory income tax rate
State income taxes, net of federal benefit
Research tax credits
Share-based compensation
Effect of non-U.S. operations
Other
Effective tax rate
78
Year Ended December 31,
2015
2014
2013
35.0%
35.0%
2.0
(1.4)
2.2
(0.9)
3.5
1.4
(1.1)
6.5
(3.6)
1.9
35.0%
1.6
(4.7)
5.2
6.8
1.6
40.4%
40.1%
45.5%
Excess tax benefits associated with stock option exercises and other equity awards are credited to stockholders' equity. The income
tax benefits resulting from stock awards that were credited to stockholders' equity were $1.72 billion, $1.85 billion and $602 million for
the years ended December 31, 2015, 2014, and 2013, respectively.
Our deferred tax assets (liabilities) are as follows (in millions):
Deferred tax assets:
Net operating loss carryforward
Tax credit carryforward
Share-based compensation
Accrued expenses and other liabilities
Other
Total deferred tax assets
Less: valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Depreciation and amortization
Purchased intangible assets
Deferred foreign taxes
Total deferred tax liabilities
Net deferred tax assets (liabilities)
December 31,
2015
2014
$
476
297
529
239
34
1,575
(205)
1,370
(270)
(934)
(15)
(1,219)
151
$
130
190
225
136
21
702
(101)
601
(101)
(1,190)
—
(1,291)
(690)
$
$
The valuation allowance was approximately $205 million and $101 million as of December 31, 2015 and 2014, respectively,
primarily related to state tax credits that we do not believe will ultimately be realized.
As of December 31, 2015, the U.S. federal and state net operating loss carryforwards were $2.70 billion and $3.31 billion, which
will begin to expire in 2032 and 2023, respectively, if not utilized. If realized, the impact of the net operating loss carryforwards will be
recognized as a benefit of $655 million through additional paid in capital. We have federal and state tax credit carryforwards of $1.08
billion and $905 million, respectively, which will begin to expire in 2030 and 2032, respectively, if not utilized.
Utilization of our net operating loss and tax credit carryforwards may be subject to substantial annual limitations due to the
ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result
in the expiration of the net operating loss and tax credit carryforwards before their utilization. The events that may cause ownership
changes include, but are not limited to, a cumulative stock ownership change of greater than 50% over a three-year period.
Our net foreign pretax income includes jurisdictions with both pretax earnings and pretax losses. Our consolidated financial
statements provide taxes for all related tax liabilities that would arise upon repatriation of earnings in the foreign jurisdictions where we
do not intend to indefinitely reinvest those earnings outside the United States, and the amount of taxes provided for has been insignificant.
The following table reflects changes in the gross unrecognized tax benefits (in millions):
Gross unrecognized tax benefits-beginning of period
$
1,682
$
1,316
$
Year Ended December 31,
2015
2014
2013
Increases related to prior year tax positions
Decreases related to prior year tax positions
Increases related to current year tax positions
Decreases related to settlements of prior year tax positions
Gross unrecognized tax benefits-end of period
$
322
(52)
1,066
(1)
3,017
$
24
—
346
(4)
1,682
79
164
425
(13)
740
—
$
1,316
During all years presented, we recognized interest and penalties related to unrecognized tax benefits within the provision for
income taxes on the consolidated statements of income. The amount of interest and penalties accrued as of December 31, 2015 and 2014
was not material.
If the balance of gross unrecognized tax benefits of $3.02 billion as of December 31, 2015 was realized in a future period, this
would result in a tax benefit of $2.40 billion within our provision of income taxes at such time.
On July 27, 2015, the United States Tax Court issued an opinion in Altera Corp. v. Commissioner related to the treatment of share-
based compensation expense in an intercompany cost-sharing arrangement. This opinion concluded that related parties in a cost-sharing
arrangement are not required to share share-based compensation. A final decision was issued by the Tax Court, however, this decision
may be appealed by the Commissioner. The impact of the conclusions stated by the Tax Court in its opinion was not material to our
consolidated financial statements.
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 through 2010 tax years. We believe that adequate amounts have been reserved for any adjustments that may ultimately
result from these examinations, and we do not anticipate a significant impact to our gross unrecognized tax benefits within the next 12
months related to these years. Our 2011 and future years remain open to examination by the IRS. Our 2011 and future years remain open
to examination in Ireland.
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.
Note 14. Geographical Information
Revenue by geography is based on the billing address of the marketer or developer. The following tables set forth revenue and
property and equipment, net by geographic area (in millions):
Revenue:
United States
Rest of the world(1)
Total revenue
Year Ended December 31,
2015
2014
2013
$
$
8,513
9,415
17,928
$
$
5,649
6,817
12,466
$
$
3,613
4,259
7,872
(1) No individual country, other than disclosed above, exceeded 10% of our total revenue for any period presented
Property and equipment, net:
United States
Sweden
Rest of the world
Total property and equipment, net
December 31,
2015
2014
$
$
4,498
$
3,256
713
476
514
197
5,687
$
3,967
80
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer (CEO) and chief financial officer (CFO), has evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Securities Exchange Act
of 1934, as amended (Exchange Act)), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation,
our CEO and CFO have concluded that as of December 31, 2015, our disclosure controls and procedures are designed at a reasonable
assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or
submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission (SEC), and that such information is accumulated and communicated to our management,
including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act). Management conducted an assessment of the effectiveness of our internal control over financial
reporting based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (2013 framework). Based on the assessment, management has concluded that its internal control over
financial reporting was effective as of December 31, 2015 to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with U.S. GAAP. Our independent registered public accounting firm, Ernst &
Young LLP, has issued an audit report with respect to our internal control over financial reporting, which appears in Part II, Item 8 of
this Annual Report on Form 10-K.
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 fourth quarter of 2015 that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures and Internal Control over Financial Reporting
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management
recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting
must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of
possible controls and procedures relative to their costs.
Item 9B. Other Information
None.
81
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission (SEC) within 120 days of the fiscal year ended December 31,
2015.
Our board of directors has adopted a Code of Conduct applicable to all officers, directors and employees, which is available on
our website (investor.fb.com) under "Corporate Governance." We intend to satisfy the disclosure requirement under Item 5.05 of Form
8-K regarding amendment to, or waiver from, a provision of our Code of Conduct and by posting such information on the website address
and location specified above.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting of
Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2015.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting of
Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2015.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting of
Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2015.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting of
Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2015.
82
PART IV
Item 15. Exhibits, Financial Statement Schedules
We have filed the following documents as part of this Form 10-K:
1. Consolidated Financial Statements:
Reports of Independent Registered Public Accounting Firm(cid:2)
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income(cid:2)
Consolidated Statements of Stockholders' Equity(cid:2)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Page No.
54
56
57
58
59
60
62
All schedules have been omitted because they are not required, not applicable, not present in amounts sufficient to require submission
of the schedule, or the required information is otherwise included.
3. Exhibits
See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.
83
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Menlo Park, State
of California, on this 28th day of January 2016.
SIGNATURES
Date:
January 28, 2016
FACEBOOK, INC.
/S/ David M. Wehner
David M. Wehner
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David
M. Wehner and Colin S. Stretch, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes
as he or she might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or
their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated:
84
Signature
Title
Date
/s/ Mark Zuckerberg
Mark Zuckerberg
Chairman and Chief Executive Officer
(Principal Executive Officer)
January 28, 2016
January 28, 2016
January 28, 2016
January 25, 2016
January 27, 2016
January 27, 2016
January 26, 2016
January 28, 2016
January 28, 2016
January 28, 2016
/s/ David M. Wehner
David M. Wehner
Chief Financial Officer
(Principal Financial Officer)
/S/ Jas Athwal
Jas Athwal
/s/ Marc L. Andreessen
Marc L. Andreessen
/s/ Erskine B. Bowles
Erskine B. Bowles
/s/ Susan D. Desmond-Hellmann
Susan D. Desmond-Hellmann
/s/ Reed Hastings
Reed Hastings
/s/ Jan Koum
Jan Koum
/s/ Sheryl K. Sandberg
Sheryl K. Sandberg
/s/ Peter A. Thiel
Peter A. Thiel
Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
85
Filed
Herewith
X
Exhibit
Number
Exhibit Description
Restated Certificate of Incorporation.
001-35551
3.1
File No.
Exhibit
Filing Date
Form
10-Q
EXHIBIT INDEX
Incorporated by Reference
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1+
Amended and Restated Bylaws.
10-Q
001-35551
3.2
Form of Class A Common Stock Certificate.
Form of Class B Common Stock Certificate.
Sixth Amended and Restated Investors' Rights
Agreement, dated December 27, 2010, by and
among Registrant and certain security holders of
Registrant.
Amendment No. 1 to Sixth Amended and Restated
Investors' Rights Agreement, dated May 1, 2012,
by and among Registrant and certain security
holders of Registrant.
Form of "Type 1" Holder Voting Agreement,
between Registrant, Mark Zuckerberg, and certain
parties thereto.
Form of Indemnification Agreement.
S-1
S-8
S-1
333-179287
4.1
333-181566
4.4
333-179287
4.2
S-1
333-179287
4.2A
S-1
333-179287
4.3
S-1
333-179287
10.1
10.2(A)+
2005 Stock Plan, as amended.
10-K
001-35551
10.2(A)
10.2(B)+
2005 Stock Plan forms of award agreements.
S-1
333-179287
10.2
10.3(A)+
2012 Equity Incentive Plan, as amended.
10-K
001-35551
10.4(A)
10.3(B)+
10.3(C)+
10.4+
10.5+
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12†
2012 Equity Incentive Plan forms of award
agreements.
2012 Equity Incentive Plan forms of award
agreements (Additional Forms).
Form of Non-Plan Restricted Stock Unit Award
Notice and Award Agreement
2015 Bonus Plan.
Amended and Restated Offer Letter, dated January
27, 2012, between Registrant and Mark
Zuckerberg.
Amended and Restated Employment Agreement,
dated January 27, 2012, between Registrant and
Sheryl K. Sandberg.
Amended and Restated Offer Letter, dated May 2,
2014, between Registrant and Christopher Cox.
Amended and Restated Offer Letter, dated
January 27, 2012, between Registrant and
Mike Schroepfer.
10-Q
001-35551
10.2
10-K
001-35551
10.3(C)
S-8
333-199172
99.1
S-1
333-179287
10.6
S-1
333-179287
10.7
10-K
001-35551
10.8
S-1
333-179287
10.9
Offer Letter, dated August 25, 2014, between
Registrant and David M. Wehner.
10-K
001-35551
10.10
Offer Letter, dated October 6, 2014, between
Registrant and Jan Koum.
Lease, dated February 7, 2011, between Registrant
and Wilson Menlo Park Campus, LLC.
10-Q
001-35551
10.1
S-1
333-179287
10.11
86
July 31,
2012
July 31,
2012
February 8,
2012
May 21,
2012
February 8,
2012
May 3,
2012
February 8,
2012
February 8,
2012
February 1,
2013
February 8,
2012
February 1,
2013
July 31,
2012
January 29,
2015
October 6,
2014
February 8,
2012
February 8,
2012
January 29,
2015
February 8,
2012
January 29,
2015
October 30,
2014
February 8,
2012
8-K
001-35551
10.1
August 15,
2013
10.13
21.1
23.1
31.1
31.2
32.1#
32.2#
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Credit Agreement, dated August 15, 2013,
between Registrant, the Lenders party thereto, and
JPMorgan Chase Bank, N.A., as Administrative
Agent.
List of subsidiaries.
Consent of Independent Registered Public
Accounting Firm.
Certification of Mark Zuckerberg, Chief
Executive Officer, pursuant to Rule 13a-14
(a)/15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Certification of David M. Wehner, Chief Financial
Officer, pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of Mark Zuckerberg, Chief
Executive Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Certification of David M. Wehner, Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
XBRL Instance Document.
XBRL Taxonomy Extension Schema Document.
XBRL Taxonomy Extension Calculation Linkbase
Document.
XBRL Taxonomy Extension Definition Linkbase
Document.
XBRL Taxonomy Extension Labels Linkbase
Document.
XBRL Taxonomy Extension Presentation
Linkbase Document.
X
X
X
X
X
X
X
X
X
X
X
X
+ Indicates a management contract or compensatory plan.
† Portions of exhibit have been granted confidential treatment by the SEC.
# This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended (Exchange
Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under
the Securities Act of 1933, as amended or the Exchange Act.
87
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-K/A
Amendment No. 1
__________________________
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2015
or
For the transition period from to
Commission File Number: 001-35551
__________________________
FACEBOOK, INC.
(Exact name of registrant as specified in its charter)
__________________________
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
Delaware
20-1665019
1601 Willow Road, Menlo Park, California 94025
(Address of principal executive offices and Zip Code)
(650) 543-4800
(Registrant's telephone number, including area code)
__________________________
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, $0.000006 par value
(Title of each class)
The NASDAQ Stock Market LLC
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
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
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
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
(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
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of June 30, 2015, the last business
day of the registrant's most recently completed second fiscal quarter, was $198 billion based upon the closing price reported for such date on
the NASDAQ Global Select Market.
On January 25, 2016, the registrant had 2,294,939,865 shares of Class A common stock and 551,340,611 shares of Class B common stock
outstanding.
None.
DOCUMENTS INCORPORATED BY REFERENCE
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (Amendment No. 1) amends our Annual Report on Form 10-K for the fiscal year ended
December 31, 2015 (Original Filing), filed with the U.S. Securities and Exchange Commission (SEC) on January 28, 2016 (Original
Filing Date). The sole purpose of this Amendment No. 1 is to include the information required by Items 10 through 14 of Part III of Form
10-K. This information was previously omitted from the Original Filing in reliance on General Instruction G(3) to Form 10-K, which
permits the information in the above referenced items to be incorporated in the Form 10-K by reference from our definitive proxy statement
if such statement is filed no later than 120 days after our fiscal year-end. We are filing this Amendment to include Part III information
in our Form 10-K because we may not file a definitive proxy statement containing such information within 120 days after the end of the
fiscal year covered by the Original Filing. The reference on the cover of the Original Filing to the incorporation by reference to portions
of our definitive proxy statement into Part III of the Original Filing is hereby deleted.
In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended (Exchange Act), Part III, Items 10
through 14 and Part IV, Item 15 of the Original Filing are hereby amended and restated in their entirety. This Amendment No. 1 does not
amend, modify, or otherwise update any other information in the Original Filing. Accordingly, this Amendment should be read in
conjunction with the Original Filing. In addition, this Amendment No. 1 does not reflect events that may have occurred subsequent to
the Original Filing Date.
Pursuant to Rule 12b-15 under the Exchange Act, this Amendment No. 1 also contains new certifications pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, which are attached hereto. Because no financial statements are included in this Amendment No. 1
and this Amendment No. 1 does not contain or amend any disclosure with respect to Items 307 and 308 of Regulation S-K, paragraphs
3, 4, and 5 of the certifications have been omitted.
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.
2
FACEBOOK, INC.
FORM 10-K/A
TABLE OF CONTENTS
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
Item 11. Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV
Item 15.
Signatures
Exhibits, Financial Statement Schedules
4
12
33
38
39
40
3
[This page intentionally left blank]
PART III
Item 10.
Directors, Executive Officers, and Corporate Governance
Directors and Executive Officers
The following
table provides
information regarding our executive officers and directors as of March 31, 2016:
Name
Mark Zuckerberg
Sheryl K. Sandberg
David M. Wehner
Christopher K. Cox
David B. Fischer
Mike Schroepfer
Colin S. Stretch
Marc L. Andreessen(1)(2)
Erskine B. Bowles(1)
Susan D. Desmond-Hellmann*(1)
Reed Hastings(2)
Jan Koum
Peter A. Thiel(2)
Age
Position(s)
31
46
47
33
43
41
46
44
70
58
55
40
48
Chairman and Chief Executive Officer
Chief Operating Officer and Director
Chief Financial Officer
Chief Product Officer
Vice President, Business and Marketing Partnerships
Chief Technology Officer
Vice President and General Counsel
Director
Director
Director
Director
Director
Director
_________________________________________
* Lead Independent Director
(1) Member of the audit committee
(2) Member of the compensation & governance committee
Mark Zuckerberg is our founder and has served as our Chief Executive Officer (CEO) and as a member of our board of
directors since July 2004. Mr. Zuckerberg has served as Chairman of our board of directors since January 2012. Mr. Zuckerberg
attended Harvard University where he studied computer science. We believe that Mr. Zuckerberg should serve as a member of our
board of directors due to the perspective and experience he brings as our founder, Chairman, and CEO, and as our largest and
controlling stockholder.
Sheryl K. Sandberg has served as our Chief Operating Officer (COO) since March 2008 and as a member of our board of
directors since June 2012. From November 2001 to March 2008, Ms. Sandberg served in various positions at Google, Inc., most
recently as Vice President, Global Online Sales & Operations. Ms. Sandberg also is a former Chief of Staff of the U.S. Treasury
Department and previously served as a consultant with McKinsey & Company, a management consulting company, and as an
economist with The World Bank. In addition to serving as our COO, Ms. Sandberg has been a member of the board of directors of
the Walt Disney Company since December 2009 and a director of SurveyMonkey since July 2015. Ms. Sandberg previously served
as a member of the board of directors of Starbucks Corporation from March 2009 to March 2012. Ms. Sandberg holds an A.B. in
economics from Harvard University and an M.B.A. from Harvard Business School. We believe that Ms. Sandberg should serve as
a member of our board of directors due to the perspective and experience she brings as our COO.
David M. Wehner has served as our Chief Financial Officer (CFO) since June 2014. Mr. Wehner joined us in November
2012 as our Vice President, Corporate Finance and Business Planning. From August 2010 until November 2012, Mr. Wehner served
as Chief Financial Officer at Zynga Inc., a provider of social game services. From February 2001 to July 2010, Mr. Wehner served
4
in various positions at Allen & Company, an investment bank, including as a Managing Director from November 2006 to July 2010
and as a director from December 2005 to November 2006. Mr. Wehner holds a B.S. in Chemistry from Georgetown University and
an M.S. in Applied Physics from Stanford University.
Christopher K. Cox has served in various positions with us since October 2005, most recently as our Chief Product Officer
(CPO). Mr. Cox joined us as a software engineer and helped build the first versions of key Facebook features, including News Feed.
Mr. Cox holds a B.S. in symbolic systems with a concentration in artificial intelligence from Stanford University.
David B. Fischer has served in various positions with us since April 2010, most recently as our Vice President, Business
and Marketing Partnerships. From July 2002 to March 2010, Mr. Fischer served in various positions at Google, including most
recently as its Vice President, Global Online Sales & Operations. Prior to joining Google, Mr. Fischer served as Deputy Chief of
Staff of the U.S. Treasury Department and was an associate editor at the U.S. News & World Report, L.P., a news magazine company.
Mr. Fischer holds a B.A. in government from Cornell University and an M.B.A. from the Stanford University Graduate School of
Business.
Mike Schroepfer has served in various positions with us since September 2008, most recently as our Chief Technology
Officer (CTO). From December 2005 to August 2008, Mr. Schroepfer served as Vice President of Engineering at Mozilla Corporation,
an Internet company. Prior to Mozilla, Mr. Schroepfer served in various positions at Sun Microsystems, Inc., an information technology
company, including as Chief Technology Officer of its data center automation division. He also co-founded CenterRun, Inc., a
developer of application provisioning software, which was acquired by Sun Microsystems. In addition to serving as our CTO, Mr.
Schroepfer previously served as a member of the board of directors of Ancestry.com Inc. from January 2011 to December 2012. Mr.
Schroepfer holds a B.S. and an M.S. in computer science from Stanford University.
Colin S. Stretch has served as our Vice President and General Counsel since July 2013 and was our Secretary from July
2013 to February 2016. Mr. Stretch first joined us in February 2010 as Deputy General Counsel. From 2002 to 2010, Mr. Stretch
was a partner at Kellogg Huber Hansen Todd Evans & Figel, PLCC, a law firm. Earlier in his career, Mr. Stretch served as a law
clerk for U.S. Supreme Court Justice Stephen Breyer and for Judge Laurence Silberman of the U.S. Court of Appeals for the D.C.
Circuit. Mr. Stretch holds an A.B. in Government from Dartmouth College and a J.D. from Harvard Law School.
Marc L. Andreessen has served as a member of our board of directors since June 2008. Mr. Andreessen is a co-founder and
has been a General Partner of Andreessen Horowitz, a venture capital firm, since July 2009. Previously, Mr. Andreessen co-founded
and served as the Chairman of the board of directors of Opsware, Inc. (formerly known as Loudcloud Inc.), a software company. He
also served as Chief Technology Officer of America Online, Inc., an Internet services company. Mr. Andreessen was a co-founder
of Netscape Communications Corporation, a software company, serving in various positions, including Chief Technology Officer
and Executive Vice President of Products. In addition to serving on our board of directors, Mr. Andreessen currently serves as a
member of the boards of directors of the Hewlett-Packard Enterprise Company and several private companies. Mr. Andreessen
previously served as a member of the boards of directors of eBay Inc. from September 2008 to October 2014 and Hewlett-Packard
Company from September 2009 to October 2015. Mr. Andreessen holds a B.S. in computer science from the University of Illinois
at Urbana-Champaign. We believe that Mr. Andreessen should serve as a member of our board of directors due to his extensive
experience as an Internet entrepreneur, venture capitalist, and technologist.
Erskine B. Bowles has served as a member of our board of directors since September 2011. Mr. Bowles is President Emeritus
of the University of North Carolina and served as President from January 2006 through December 2010. Mr. Bowles has also been
a Senior Advisor and non-executive vice chairman of BDT Capital Partners, LLC, a private investment firm, since January 2012.
From February 2010 until December 2010, he served as Co-Chair of the National Commission on Fiscal Responsibility and Reform.
Mr. Bowles was Managing Director of Carousel Capital LLC, a private investment firm, from 1999 to 2001, and was a Senior Advisor
for the firm from 2001 to 2015. He was also a partner of Forstmann Little & Co., an investment firm, from 1999 to 2001. Mr. Bowles
began his career in corporate finance at Morgan Stanley & Co. LLC and subsequently helped found and ultimately served as Chairman
and Chief Executive Officer of Bowles Hollowell Connor & Co., an investment banking firm. He also was a founder of Kitty Hawk
Capital, a venture capital firm. Mr. Bowles served as White House Chief of Staff from 1996 to 1998 and Deputy White House Chief
5
of Staff from 1994 to 1995. In addition to serving on our board of directors, Mr. Bowles currently serves as a member of the boards
of directors of Morgan Stanley and Norfolk Southern Corporation. Mr. Bowles also served as a member of the board of directors of
General Motors Company from June 2005 to April 2009, Cousins Properties Incorporated from August 2003 to May 2012, and Belk,
Inc. from May 2011 to November 2015. Mr. Bowles holds a B.S. in business from the University of North Carolina at Chapel Hill
and an M.B.A. from Columbia University Graduate School of Business. We believe that Mr. Bowles should serve as a member of
our board of directors due to his extensive experience in the financial services industry and academia as well as his distinguished
public service.
Susan D. Desmond-Hellmann has served as a member of our board of directors since March 2013. Dr. Desmond-Hellmann
has served as the Chief Executive Officer of the Bill & Melinda Gates Foundation since May 2014. Prior to the Bill & Melinda Gates
Foundation, Dr. Desmond-Hellmann was the Chancellor and Arthur and Toni Rembe Rock Distinguished Professor, University of
California, San Francisco (UCSF), where she served since August 2009. From 2004 through 2009, Dr. Desmond-Hellmann served
as President of Product Development at Genentech, where she was responsible for pre-clinical and clinical development, business
development, and product portfolio management. She joined Genentech in 1995. Prior to joining Genentech, Dr. Desmond-Hellmann
was associate director of clinical cancer research at Bristol-Myers Squibb Pharmaceutical Research Institute. In addition to serving
on our board of directors, Dr. Desmond-Hellmann currently serves as a member of the board of directors of The Procter & Gamble
Company. Dr. Desmond-Hellmann holds a B.S. in Pre-Med and an M.D. from the University of Nevada, Reno, and an M.P.H. from
the University of California, Berkeley. We believe Dr. Desmond-Hellmann should serve as a member of our board of directors due
to her extensive leadership and technology experience.
Reed Hastings has served as a member of our board of directors since June 2011. Mr. Hastings has served as the Chief
Executive Officer and Chairman of the board of directors of Netflix, Inc., a provider of an Internet subscription service for movies
and television shows, since 1999. Prior to Netflix, Mr. Hastings served as Chief Executive Officer of Technology Network, a political
service organization for the technology industry. Mr. Hastings served as Chief Executive Officer of Pure Atria Software, a maker of
software development tools, from 1991 until it was acquired by Rational Software Corporation in 1997. Mr. Hastings previously
served as a member of the board of directors of Microsoft Corporation from March 2007 to November 2012. Mr. Hastings holds a
B.A. in mathematics from Bowdoin College and an M.S.C.S. in computer science from Stanford University. We believe that Mr.
Hastings should serve as a member of our board of directors due to his extensive experience with technology companies.
Jan Koum has served as a member of our board of directors since October 2014. Since February 2009, Mr. Koum has served
and continues to serve as co-founder and Chief Executive Officer of WhatsApp Inc. (WhatsApp), a cross-platform mobile messaging
application company and our wholly-owned subsidiary. Mr. Koum attended San Jose State University where he studied math and
computer science. Mr. Koum left San Jose State University before achieving a degree. We believe that Mr. Koum should serve as a
member of our board of directors due to the perspective and experience he brings as the co-founder and Chief Executive Officer of
WhatsApp.
Peter A. Thiel has served as a member of our board of directors since April 2005. Mr. Thiel has served as President of Thiel
Capital, an investment firm, since 2011, a Partner of Founders Fund, a venture capital firm, since 2005, and President of Clarium
Capital Management, a global macro investment manager, since 2002. In 1998, Mr. Thiel co-founded PayPal, Inc., an online payment
company, where he served as Chief Executive Officer, President, and Chairman of its board of directors from 2000 until its acquisition
by eBay in 2002. Mr. Thiel holds a B.A. in Philosophy from Stanford University and a J.D. from Stanford Law School. We believe
that Mr. Thiel should serve as a member of our board of directors due to his extensive experience as an entrepreneur and venture
capitalist, and as one of our early investors.
Executive Officers
Our executive officers are designated by, and serve at the discretion of, our board of directors. There are no family relationships
among any of our directors or executive officers.
6
Board of Directors
Our board of directors may establish the authorized number of directors from time to time by resolution. The current
authorized number of directors is nine. Our current directors, if elected, will continue to serve as directors until the next annual
meeting of stockholders and until his or her successor has been elected and qualified, or until his or her earlier death, resignation, or
removal.
Our board of directors held four meetings during 2015. No member of our board of directors attended fewer than 75% of
the aggregate of the total number of meetings of the board of directors (held during the period for which he or she was a director)
and the total number of meetings held by all committees of the board of directors on which such director served (held during the
period that such director served). Members of our board of directors are invited and encouraged to attend each annual meeting of
stockholders.
Board Leadership Structure
Mark Zuckerberg, our founder and CEO, serves as Chairman of our board of directors and presides over meetings of the
board of directors, and holds such other powers and carries out such other duties as are customarily carried out by the Chairman of
our board of directors. Mr. Zuckerberg brings valuable insight to our board of directors due to the perspective and experience he
brings as our founder and CEO, and as our largest and controlling stockholder. Dr. Desmond-Hellman currently serves as our Lead
Independent Director and presides over portions of regularly scheduled meetings at which only our independent directors are present,
serves as a liaison between the Chairman and the independent directors, and performs such additional duties as the board of directors
may otherwise determine and delegate. Generally, each regular meeting of our board of directors includes a meeting of our independent
directors without management present.
Controlled Company Status
Because Mr. Zuckerberg controls a majority of our outstanding voting power, we are a “controlled company” under the
corporate governance rules of the NASDAQ Stock Market LLC (NASDAQ). Therefore, we are not required to have a majority of
our board of directors be independent, nor are we required to have a compensation committee or an independent nominating function.
In light of our status as a controlled company, our board of directors has determined not to have an independent nominating function
and to have the full board of directors be directly responsible for nominating members of our board. Notwithstanding our status as
a “controlled company,” we intend to continue to have a compensation & governance committee that is composed entirely of
independent directors.
Director Independence
The rules of NASDAQ generally require that a majority of the members of a listed company’s board of directors be
independent. In addition, the listing rules generally require that, subject to specified exceptions, each member of a listed company’s
audit, compensation, and governance committees be independent. Although we are a “controlled company” under the corporate
governance rules of NASDAQ and, therefore, are not required to comply with certain rules requiring director independence, we have
nevertheless opted, under our corporate governance guidelines, to have a majority of the members of our board of directors be
independent and to have a compensation & governance committee comprised solely of independent directors.
Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Securities Exchange
Act of 1934, as amended (Exchange Act). In order to be considered independent for purposes of Rule 10A-3, a member of an audit
committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors,
or any other board committee: accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed
company or any of its subsidiaries; or be an affiliated person of the listed company or any of its subsidiaries.
Our board of directors has determined that none of our non-employee directors has a relationship that would interfere with
the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent”
as that term is defined under the rules of NASDAQ. Our board of directors has also determined that Messrs. Andreessen and Bowles,
7
and Dr. Desmond-Hellmann, who comprise our audit committee, and Messrs. Andreessen, Hastings, and Thiel, who comprise our
compensation & governance committee, satisfy the independence standards for those committees established by applicable SEC
rules, NASDAQ rules and applicable rules of the Internal Revenue Code of 1986, as amended (Code).
Classified Board
So long as the outstanding shares of our Class B common stock represent a majority of the combined voting power of
common stock, we will not have a classified board of directors, and all directors will be elected for annual terms. As of the close of
business on April 29, 2016, the outstanding shares of Class B common stock represented a majority of the combined voting power
of our common stock.
However, our restated certificate of incorporation and our amended and restated bylaws provide that when the outstanding
shares of our Class B common stock represent less than a majority of the combined voting power of common stock, we will have a
classified board of directors consisting of three classes of approximately equal size, each serving staggered three-year terms. At such
time, our directors will be assigned by the then-current board of directors to a class. Upon expiration of the term of a class of directors,
directors for that class will be elected for three-year terms at the annual meeting of stockholders in the year in which that term expires.
As a result, only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing
for the remainder of their respective three-year terms. Each director’s term continues until the next annual meeting of stockholders
and until his or her successor has been elected and qualified, or until his or her earlier death, resignation, or removal.
In addition, when the outstanding shares of our Class B common stock represent less than a majority of the combined voting
power of our common stock and we have a classified board, only our board of directors may fill vacancies on our board. Any additional
directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the total number of directors.
The classification of our board of directors, if implemented, may have the effect of delaying or preventing changes in our
control or management.
Board Committees
Our board of directors has established an audit committee and a compensation & governance committee, each of which
have the composition and responsibilities described below. Members serve on these committees until their resignations or until
otherwise determined by our board of directors. Each of these committees has a written charter. Current copies of the charters of the
audit committee and compensation & governance committee are available on our website at http://investor.fb.com/governance.cfm.
From time to time, the board of directors may also establish ad hoc committees to address particular matters. In August
2015, our board of directors (with the employee directors abstaining) established a special committee to review a proposal to amend
our current restated certificate of incorporation. The Special Committee consists of independent directors Dr. Desmond-Hellman
(Chairperson) and Messrs. Andreessen and Bowles.
Audit Committee
Our audit committee is comprised of Messrs. Andreessen and Bowles, and Dr. Desmond-Hellmann. Mr. Bowles is the
chairman of our audit committee, is our audit committee financial expert, as that term is defined under SEC rules, and possesses
financial sophistication as defined under the rules of NASDAQ. The designation does not impose on Mr. Bowles any duties, obligations
or liabilities that are greater than are generally imposed on members of our audit committee and our board of directors. Our board
of directors has adopted a charter for our audit committee. As more fully described in its charter, our audit committee is directly
responsible for, among other things:
•
selecting the independent registered public accounting firm to audit our financial statements;
8
•
•
•
•
•
•
•
ensuring the independence of the independent registered public accounting firm;
discussing the scope and results of the audit with the independent registered public accounting firm, and reviewing,
with management and that firm, our interim and year-end operating results;
developing procedures to enable submission of anonymous concerns about accounting or auditing matters;
considering the adequacy of our internal accounting controls and audit procedures;
reviewing related party transactions;
reviewing our legal compliance risk exposures and program for promoting and monitoring compliance with applicable
legal and regulatory requirements;
pre-approving all audit and non-audit services to be performed by the independent registered public accounting firm;
and
•
overseeing our internal audit function.
During 2015, the audit committee met in person or by telephone, or acted by unanimous written consent, eight times.
Compensation & Governance Committee
Our compensation & governance committee is comprised of Messrs. Andreessen, Hastings, and Thiel. Mr. Hastings is the
chairman of our compensation & governance committee. Each member of this committee is a non-employee director, as defined
pursuant to Rule 16b-3 promulgated under the Exchange Act, and an outside director, as defined under Section 162(m) of the Code.
Our board of directors has adopted a charter for our compensation & governance committee. As more fully described in its charter,
our compensation & governance committee is responsible for, among other things:
•
•
•
•
•
•
•
•
•
evaluating the performance of our executive officers;
evaluating, recommending, approving and reviewing executive officer compensation arrangements, plans, policies and
programs maintained by us;
administering our equity-based compensation plans and our annual bonus plan;
considering and making recommendations regarding non-employee director compensation;
considering and making recommendations to our board of directors regarding its remaining responsibilities relating to
executive compensation;
developing and recommending corporate governance guidelines and policies;
overseeing the evaluation process for our board of directors and committees thereof;
reviewing and granting proposed waivers of the code of conduct for executive officers; and
advising our board of directors on corporate governance matters and board of director performance matters, including
recommendations regarding the structure and composition of our board of directors and committees thereof.
The charter for our compensation & governance committee allows the committee from time to time to delegate its authority
to subcommittees and to our officers, as it may be deemed necessary or appropriate. In December 2013, our compensation committee
(which was the predecessor to our compensation & governance committee) authorized the formation and delegation of certain
authority to an equity subcommittee, which is now a subcommittee of the compensation & governance committee. The current
members of the equity subcommittee are Ms. Sandberg and Mr. Wehner, and the members, acting either individually or jointly, have
the authority to review and approve restricted stock units (RSUs) to employees and consultants, other than to directors and our
executive officers. The compensation & governance committee has not adopted a written charter for the equity subcommittee.
Notwithstanding our status as a “controlled company,” we intend to continue to have a compensation & governance
committee that is composed entirely of independent directors.
9
During 2015, the compensation & governance committee met in person or by telephone, or acted by unanimous written
consent, ten times, which includes the separate meetings of the compensation and governance committees before the committees
were combined in June 2015.
During 2015, the equity subcommittee of compensation & governance committee met in person or by telephone, or acted
by unanimous written consent, fourteen times.
Policy Regarding Nominations
The policy of our board of directors is to encourage the selection of directors who will contribute to our mission to make
the world more open and connected. Our board of directors is responsible for identifying and nominating members for election to
our board of directors. The board of directors considers recommendations from directors, stockholders, and others as it deems
appropriate, including our founder, Chairman, CEO, and controlling stockholder, Mr. Zuckerberg. Our board of directors may review
from time to time the appropriate skills and characteristics desired of members of the board of directors, including the appropriate
role of diversity. In evaluating potential candidates for nomination, our board of directors considers these factors in the light of the
specific needs of the board of directors at that time and shall also consider advice and recommendations from our compensation &
governance committee and from Mr. Zuckerberg.
The board of directors does not distinguish between nominees recommended by stockholders and other nominees. However,
stockholders desiring to nominate a director candidate at the annual meeting must comply with certain procedures and requirements
established by the SEC and our amended and restated bylaws and the stockholder must give timely notice to our Secretary in
accordance with our amended and restated bylaws. Our amended and restated bylaws are available on our website at http://
investor.fb.com/governance.cfm. Such nominations and notice should be submitted to Facebook, Inc., 1601 Willow Road, Menlo
Park, California 94025, Attention: Secretary.
Board Role in Risk Oversight
Our board of directors as a whole has responsibility for overseeing our risk management. The board of directors exercises
this oversight responsibility directly and through its committees. The oversight responsibility of the board of directors and its
committees is informed by reports from our management team and from our internal audit department that are designed to provide
visibility to the board of directors about the identification and assessment of key risks and our risk mitigation strategies. The full
board of directors has primary responsibility for evaluating strategic and operational risk management, and for CEO succession
planning. Our audit committee has the responsibility for overseeing our major financial and accounting risk exposures as well as
legal and regulatory risk exposures. Our audit committee also oversees the steps our management has taken to monitor and control
these exposures, including policies and procedures for assessing and managing risk and related compliance efforts. Finally, our audit
committee oversees our internal audit function. Our compensation & governance committee evaluates risks arising from our
compensation policies and practices, as more fully described in Part III, Item 11, “Executive Compensation—Compensation
Discussion and Analysis—Compensation Risk Assessment.” The audit committee and the compensation & governance committee
provide reports to the full board of directors regarding these and other matters.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act and the rules of the SEC require our directors, executive officers and persons who own
more than 10% of our Class A common stock to file reports of their ownership and changes in ownership of our Class A common
stock with the SEC. Based solely on our review of the reports filed during 2015 and questionnaires from our directors and executive
officers, we determined that no director, executive officer, or beneficial owner of more than 10% of our Class A common stock failed
to file a report on a timely basis during 2015, except for: (i) a late Form 4 filed by Reed Hastings to report vesting of his RSUs and
acquisition of shares of Class A common stock dated June 10, 2015 and (ii) a late Form 4 filed by Colin S. Stretch to report the sale
of our Class A common stock pursuant to a Rule 10b5-1 trading plan dated November 30, 2015.
10
Stockholder Communications
Stockholders may contact our board of directors about bona fide issues or questions about Facebook by sending a letter to
the following address: c/o Facebook, Inc., 1601 Willow Road, Menlo Park, California, 94025, Attention: Board of Directors. Each
communication should specify the applicable addressee or addressees to be contacted, the general topic of the communication, and
the class and number of shares of our stock that are owned of record (if a record holder) or beneficially. If a stockholder wishes to
contact the independent members of our board of directors, the stockholder should address such communication to the attention of
the Lead Independent Director at the address above. Our legal department will initially receive and process communications before
forwarding them to the addressee, and generally will not forward a communication that is unrelated to the duties and responsibilities
of the board of directors, including communications the legal department determines to be primarily commercial in nature, is related
to an improper or irrelevant topic, or is a request for general information about the company, its products, or services. In addition,
material that is unduly hostile, threatening, illegal, or similarly unsuitable will be excluded, with the provision that any communication
that is filtered out must be made available to any non-management director upon request.
Code of Conduct
We have adopted a Code of Conduct that applies to members of our board of directors, our executive officers, employees,
contractors, consultants, and others working on our behalf. The Code of Conduct is available on our website at http://investor.fb.com/
governance.cfm. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver
from, a provision of our Code of Conduct by posting such information on our website at the address specified above.
11
Item 11. Executive Compensation
Compensation Discussion and Analysis
Overview
This section explains our executive compensation philosophy, objectives, and design; our compensation-setting process;
our executive compensation program components; and the decisions made in 2015 with respect to the compensation of each of our
named executive officers. Our named executive officers for 2015, which consist of the executive officers who appear in “—2015
Summary Compensation Table” below, are:
• Mark Zuckerberg, our founder, Chairman, and Chief Executive Officer (CEO);
•
Sheryl K. Sandberg, our Chief Operating Officer (COO);
• David M. Wehner, our Chief Financial Officer (CFO)
• Christopher K. Cox, our Chief Product Officer (CPO); and
• Mike Schroepfer, our Chief Technology Officer (CTO).
Executive Compensation Philosophy, Objectives and Design
Philosophy. We are focused on our mission to make the world more open and connected. We believe that Facebook is still
in the early stages of this journey and that for us to be successful we must hire and retain people who can continue to develop our
strategy, quickly innovate and build new products, bolster the growth of our user base and user engagement, and constantly enhance
our business model.
To achieve these objectives, we need a highly talented team comprised of engineering, product, sales, and general and
administrative professionals. We also expect our executive team to possess and demonstrate strong leadership and management
capabilities.
Objectives. Our compensation programs for our named executive officers are built to support the following objectives:
•
•
•
•
•
attract the top talent in our leadership positions and motivate our executives to deliver the highest level of individual
and team impact and results;
encourage our executives to model the important aspects of our culture, which include moving fast, being bold,
communicating openly, focusing on impact, and building social value in the world;
ensure each one of our named executive officers receives a total compensation package that encourages his or her long-
term retention;
reward high levels of performance with commensurate levels of compensation; and
align the interests of our executives with those of our stockholders in the overall success of Facebook by emphasizing
long-term incentives.
Design. Our executive compensation program continues to be heavily weighted towards equity, in particular restricted stock
units (RSUs), with cash compensation that is generally below market relative to executive compensation at our peer companies. We
believe that equity compensation offers the best vehicle to focus our executive officers on our mission and the achievement of our
long-term strategic and financial objectives, and to align our executive officers with the long-term interests of our stockholders.
We typically grant our executive officers an annual equity award with service-based vesting conditions where the
commencement of vesting is deferred until a date some years in the future, as discussed further in “—Elements of Executive
Compensation—Equity Compensation” below. When combined with the executives' prior equity awards, we believe that these
additional grants represent a strong long-term retention tool and provide the executive officers with long-term equity incentives.
We evaluate our executive compensation programs, including our mix of cash and equity compensation, on an annual basis
or as circumstances require based on our business objectives and the competitive environment for talent. For the near future, we
12
anticipate continuing our emphasis on pay-for-performance and long-term incentive compensation for our executive officers while
increasing cash compensation in order to move closer to market relative to our peer companies.
Compensation-Setting Process
Role of Our Compensation & Governance Committee. The compensation & governance committee is responsible for
overseeing all aspects of our executive compensation programs, including executive salaries, payouts under our bonus plan, the size
and structure of equity awards, and any executive perquisites. The compensation & governance committee is solely responsible for
determining the compensation of our CEO and reviews and approves compensation of other executive officers. The compensation
& governance committee was formed in June 2015 by merging two separate committees of our board of directors, the compensation
committee and the governance committee. The compensation & governance committee is the successor to the compensation
committee in all respects. We will not distinguish between the compensation committee and the compensation & governance
committee and will refer to the compensation & governance committee throughout this document.
Role of Management. In setting compensation for 2015, our CEO, our COO, and our Head of People worked closely with
the compensation & governance committee in managing our executive compensation program and attended meetings of the
compensation & governance committee. Our CEO and COO made recommendations to the compensation & governance committee
regarding compensation for our executive officers other than for themselves because of their daily involvement with our executive
team. No executive officer participated directly in the final deliberations or determinations regarding his or her own compensation
package, except for our CEO who has requested that his base salary continue to be fixed at $1 per year.
Our management team and the compensation & governance committee each play a role in evaluating and mitigating any
risk that may exist relating to our compensation plans, practices and policies for all employees, including our named executive
officers, as further described in “—Compensation Risk Assessment” below.
Role of Compensation Consultant. The compensation & governance committee has the authority to engage its own advisors
to assist in carrying out its responsibilities. In 2015, the compensation & governance committee engaged the services of Compensia,
Inc. (Compensia), a national compensation consulting firm, to advise the compensation & governance committee regarding the
amount and types of compensation that we provide to our executives and how our compensation practices compared to the
compensation practices of other companies. Compensia reports directly to the compensation & governance committee. Compensia
does not provide any services to us other than the services provided to the compensation & governance committee. The compensation
& governance committee believes that Compensia does not have any conflicts of interest in advising the compensation & governance
committee under applicable SEC or NASDAQ rules.
Use of Comparative Market Data. We aim to compensate our executive officers at levels that are commensurate with the
most competitive levels of compensation for executives in similar positions at a group of publicly-traded peer companies set forth
below, with whom we compete for hiring and retaining executive talent (our Peer Group). The compensation & governance committee
also considered the scope of responsibility of each executive officer, our current practice of maintaining minimal differentiation
between the cash packages of our executive officers, the unvested balances of equity awards for each executive officer, as well as
the compensation & governance committee's assessment of each executive officer's performance and impact on the organization. In
determining 2015 compensation, we did not use a formula for taking into account these different factors.
We analyze market data for executive compensation at least annually using the most relevant published survey sources,
public filings and input from Compensia. Management and Compensia provided the compensation & governance committee with
both cash and equity compensation data for our Peer Group, which was selected from companies that meet some or all of the criteria
listed below:
13
•
•
high technology or media company;
key talent competitor;
• minimum revenue of $4 billion; and/or
• minimum market capitalization of $50 billion.
Using this criteria as a baseline, the compensation & governance committee approved the following companies for inclusion
in our compensation Peer Group for 2015:
Adobe
Alphabet
Amazon.com
Apple
Cisco Systems
eBay
EMC
LinkedIn
Microsoft
Netflix
Qualcomm
salesforce.com
SAP
The Walt Disney Company
Twitter
VMware
Yahoo!
In the fourth quarter of 2014, our compensation & governance committee reviewed our executive compensation against
this Peer Group to ensure that our executive officer compensation was competitive and sufficient to recruit and retain our executive
officers. Compensia provided the compensation & governance committee with total cash compensation data (base salaries and cash
bonus awards at target) and total compensation data (total cash compensation and equity compensation) at various percentiles. While
the compensation & governance committee considered this data in determining executive officer compensation, we did not seek to
benchmark our executive compensation to any particular level. The total compensation for our named executive officers was not
determined based on any pre-set “target” percentile of market. Rather, we sought to compensate our executive officers at a level that
would allow us to successfully recruit and retain the best possible talent for our executive team. We relied heavily on the knowledge
and experience of the compensation & governance committee and our management in determining the appropriate compensation
levels for our executive officers. Overall, based on Compensia's analysis of our Peer Group, target total cash compensation for our
executive officers was below the 25th percentile of our peers. When equity compensation was factored in, without taking into account
the effect of the deferred vesting start dates that are applicable to the equity compensation of our executive officers, total compensation
for our named executive officers, other than our CEO, fell between the 50th and 90th percentile relative to the companies in the Peer
Group. In the second quarter of 2015, the compensation & governance committee reviewed the selection criteria and the companies
in the Peer Group. Following that review, the compensation & governance committee decided not to make any changes to the
composition of the Peer Group. Accordingly, we plan to use the following list of companies in our Peer Group for the 2016 executive
compensation process:
Adobe
Alphabet
Amazon.com
Apple
Cisco Systems
eBay
EMC
LinkedIn
Microsoft
Netflix
Qualcomm
salesforce.com
SAP
The Walt Disney Company
Twitter
VMware
Yahoo!
14
The compensation & governance committee expects to periodically review and update this Peer Group and the underlying
criteria as our business and market environment continue to evolve.
Elements of Executive Compensation
Our executive officer compensation packages generally include:
•
•
•
base salary;
performance-based cash incentives; and
equity-based compensation in the form of RSUs.
We believe that our compensation mix supports our objective of focusing on at-risk compensation having significant financial
upside based on company and individual performance. We expect to continue to emphasize equity awards because of the direct link
that equity compensation provides between stockholder interests and the interests of our executive officers, thereby motivating our
executive officers to focus on increasing our value over the long term.
Base Salary. The compensation & governance committee believes base salaries are a necessary element of compensation
in order to attract and retain highly qualified executive officers. The compensation & governance committee reviews base salaries
for our executive officers at least annually and may adjust them from time to time, if needed, to reflect changes in market conditions
or other factors. Historically, our executive officers have received base salaries within a very narrow range that was established when
we were a smaller company with cash constraints, and based on our desire to maintain internal pay equity between executive officers
and also relative to other key employees. As we have grown, we have increased base salaries for our executive officers (other than
our CEO) with the goal of bringing salaries closer to market over time.
In the first quarter of 2015, the compensation & governance committee decided to increase the base salaries of our executive
officers, other than our CEO, in order to continue to bring their salaries closer to those paid by our Peer Group companies for similar
positions. Accordingly, our compensation & governance committee increased the base salary of Ms. Sandberg by $60,000 and Messrs.
Wehner, Cox, and Schroepfer by $50,000. Following these 2015 salary increases, as noted above, these executive officer salaries
fell between the 25th and 50th percentile of the salaries provided by our Peer Group companies for executives in similar positions.
Mr. Zuckerberg has previously requested to receive a base salary of $1 per year.
Named Executive Officer
Mark Zuckerberg
Sheryl K. Sandberg
David M. Wehner
Christopher K. Cox
Mike Schroepfer
2015 Base Salary
$
$
$
$
$
1
700,000
650,000
625,000
625,000
Cash Bonuses. Our 2015 Bonus Plan (Bonus Plan) provides variable cash incentives, payable semi-annually, that are designed
to motivate our executive officers to focus on company-wide priorities and to reward them for individual results and achievements.
In 2015, the individual target bonus percentage for each named executive officer was unchanged from 2014 at 75% of such executive’s
base salary. After the 2015 base salary increases noted above, target total cash compensation (base salary plus target bonus) for
executive officers other than our CEO, was at approximately the 25th percentile of our Peer Group companies for executives in
similar positions. All of our executive officers, except our CEO, participated in the Bonus Plan in 2015.
For 2015, there were two six-month performance periods under our Bonus Plan, which we refer to as First Half 2015 and
Second Half 2015. For each performance period in 2015, the compensation & governance committee approved a set of company-
wide priorities in order to focus our executive officers on key areas of performance for the period in question. The First Half 2015
and Second Half 2015 company priorities reflect operational and non-operational objectives established by our compensation &
governance committee, in consultation with our CEO and CFO. The company-wide priorities do not have specific targets associated
15
with them for purposes of determining performance under the Bonus Plan, and our compensation & governance committee has
complete discretion to determine the level of bonus payout for each performance period.
2015 Priorities and Company Performance Percentage. Our First Half 2015 company-wide priorities were as follows: grow
our user base across all our products, increase sharing and engagement, continue to achieve revenue growth and significant savings
from efficiency, improve product quality, improve our brand, and make progress toward our long-term investments. None of these
priorities were assigned any specific weighting or dollar amount of the total bonus. The compensation & governance committee
applied discretion in determining the company performance percentage on a qualitative basis, taking into account our delivery of
results in the areas identified by the company-wide priorities approved by the compensation & governance committee, as well as
our overall business, engineering, and product development achievements. The compensation & governance committee also did not
determine any pre-set ranges for the company performance percentage. The First Half 2015 company performance percentage
approved by the compensation & governance committee was 110%. The compensation & governance committee focused on our
performance across all of the areas identified by the company-wide priorities.
Our Second Half 2015 company-wide priorities were as follows: grow our user base across all of our products, increase
sharing, engagement, and utility, continue to achieve revenue growth and significant savings from efficiency, improve product quality,
improve our brand and make progress toward our long-term investments. None of these priorities were assigned any specific weighting
or dollar amount of the total bonus. The compensation & governance committee applied discretion in determining the company
performance percentage on a qualitative basis, taking into account our delivery of results in the areas identified by the company-
wide priorities approved by the compensation & governance committee, as well as our overall business, engineering, and product
development achievements. The compensation & governance committee also did not determine any pre-set ranges for the company
performance percentage. The Second Half 2015 company performance percentage approved by the compensation & governance
committee was 125%. The compensation & governance committee focused on our performance across all of the areas identified by
the company-wide priorities, particularly the strength of our user growth and engagement and our continued strong revenue growth.
Bonus Plan Payouts. We calculate Bonus Plan payouts to each participant using the following formula:
Base Eligible
Earnings ($)
x
Individual
Bonus Target
Percentage (%)
x
Individual
Performance
Percentage (%)
x
Company
Performance
Percentage (%)
=
Individual
Bonus
Payout ($)
Individual Performance Percentage. The individual performance percentage is based upon each executive's individual
performance assessment for the performance period under consideration. In line with our pay-for-performance philosophy, a higher
performance assessment drives a higher individual percentage (and vice-versa) such that it is possible for an executive with a low
assessment to get less than their target bonus payout, or no bonus payout whatsoever. In 2015, potential individual performance
percentages under our Bonus Plan were 0%, 85%, 100%, 125%, 200%, or 300%. An executive meeting our expected high level of
performance expectations would receive an individual performance percentage of 100%.
Individual performance assessments for each executive officer were determined at the discretion of the compensation &
governance committee in close consultation with our CEO and our COO (except in each case when their own performance assessment
was being determined). The performance assessment determinations were based on an overall subjective assessment of each officer's
performance and no single factor was determinative in setting bonus levels, nor was the impact of any individual factor on the bonus
quantifiable. We operate in a rapidly evolving and highly competitive industry and we set a high bar for performance expectations
for each one of our executive officers. The compensation & governance committee evaluates our executive officers based on their
overall performance, impact, and results, as well as their demonstration of strong leadership, long-term vision, effective execution,
and management capabilities. First Half 2015 and Second Half 2015 payout levels and achievements and considerations for each
executive were as follows:
Mark Zuckerberg. Mr. Zuckerberg did not participate in the Bonus Plan in 2015. Although Mr. Zuckerberg did not participate
in the Bonus Plan, the compensation & governance committee separately assessed his performance as our CEO.
16
Sheryl K. Sandberg. Ms. Sandberg received $558,462 for the First Half 2015 bonus, which reflected her overall leadership
and execution on business priorities, her contribution to growing revenue, including the continued growth in mobile ad revenue, and
her leadership in key policy matters. Ms. Sandberg received $706,731 for the Second Half 2015 bonus, which reflected her role in
growing our revenue year over year, her strategic guidance in various business matters, and the strong growth in the number of
advertisers on our platform.
David M. Wehner. Mr. Wehner received $325,240 for the First Half 2015 bonus, which reflected his overall leadership of
our finance organization and, in particular, driving long range planning for the company. Mr. Wehner received $328,125 for the
Second Half 2015 bonus, which reflected his effective communication with our investors, strategic facilities planning for our growing
workforce and his contributions to the strong financial performance of the company, as well as the overall performance of the finance
function.
Christopher K. Cox. Mr. Cox received $499,760 for the First Half 2015 bonus, which reflected his overall leadership of the
product organization, improvements in the quality of News Feed and his contributions to increases in user growth and engagement.
Mr. Cox received $394,381 for the Second Half 2015 bonus, which reflected his leadership and innovations in the areas of product
design and engagement such as Reactions, progress in our brand efforts, and continued growth in time spent with our products.
Mike Schroepfer. Mr. Schroepfer received $312,350 for the First Half 2015 bonus, which reflected his leadership and
execution on our engineering priorities, recruitment of engineering leadership talent and the continued development of a sustainable
and cost-effective engineering infrastructure. Mr. Schroepfer received $631,010 for the Second Half 2015 bonus, which reflected
his strong leadership of the engineering team, successful launch of Gear VR, and continued progress on other long-term investments.
The following table summarizes the calculations that were used in determining the cash bonus paid to each of our named
executive officers:
Sheryl K. Sandberg
Performance
Period
First Half 2015
Second Half 2015
Total
David M. Wehner
First Half 2015
Second Half 2015
Total
Christopher K. Cox
First Half 2015
Second Half 2015
Total
Mike Schroepfer
First Half 2015
Second Half 2015
Total
Individual
Bonus
Percentage
(target
bonus) (%)
75
Individual
Performance
Percentage
(%)
200
Company
Performance
Percentage
(%)
110
Base Eligible
Earnings ($)(1)
338,462
376,923
715,385
315,385
350,000
665,385
302,885
336,538
639,423
302,885
336,538
639,423
75
75
75
75
75
75
75
200
125
100
200
125
125
200
125
110
125
110
125
110
125
Individual
Bonus
Payout ($)
558,462
706,731
1,265,193
325,240
328,125
653,365
499,760
394,381
894,141
312,350
631,010
943,360
(1) Reflects actual earnings for 2015, which may differ from approved 2015 base salaries due to the effective dates of salary increases and the
number of pay dates in the calendar year.
Equity Compensation. Most of our executive officers' compensation is delivered through equity awards. We use equity
compensation to align our executive officers' financial interests with those of our stockholders, to attract industry leaders of the
highest caliber, and to retain them for the long term. In addition to the initial equity grant that each executive receives as part of his
or her new hire package, the compensation & governance committee typically grants our executives additional equity awards each
year as part of our company-wide equity refresher program. Additional equity grants for each of our executive officers are determined
on a discretionary basis taking into account the following factors:
17
•
•
•
•
delivering equity values that are highly competitive when compared against those our Peer Group would grant to
executives with similar responsibility;
each executive officer's individual performance assessment, the results and contributions delivered during the year, as
well as the anticipated potential future impact of each individual executive;
the size and vesting schedule of existing equity grants in order to maximize the long-term retentive power of all additional
grants; and
the size of each executive officer's total cash compensation (base salary plus cash bonus awards at target), which is
generally lower than the cash compensation for executives with similar responsibilities at our Peer Group.
Based on the foregoing factors, in 2015, our compensation & governance committee awarded each of our executive officers,
other than our CEO, a grant of RSUs with a specific “initial equity value” based on an estimated total value for each grant before
taking into account the deferred vesting considerations described below. The compensation & governance committee applied
discretion in determining the specific individual equity values, vesting schedules and vesting start dates. Based on these qualitative
decisions, the compensation & governance committee then calculated the number of RSUs to be granted by dividing this initial
equity value by $75.72 per share, which was the average closing price for the seven trading days following the announcement of our
earnings for the fourth quarter of 2014 and the same price that was used for 2015 refresher grants to all other employees.
Vesting of 2015 RSU Grants. Due to our desire to provide incentives for our executive officers to focus on long-term strategic
and financial objectives, the compensation & governance committee deferred the vesting start dates of all 2015 RSU grants made
to our executive officers, other than our CFO, to a future date determined individually for each executive. As a result, the 2015 RSU
grants generally will not begin to vest unless the recipient remains continuously employed by us through future dates as described
in the following paragraphs and in “—2015 Grants of Plan-Based Awards Table” below. The compensation & governance committee
reviewed the size and vesting schedule for the remaining unvested portion of the outstanding equity award holdings of each of our
executive officers and agreed with the recommendation of our CEO and COO (except that our COO did not participate in discussions
regarding her own equity compensation) that the existing equity awards appropriately satisfied our retention and incentive goals for
the immediate future for each of our executive officers. Accordingly, the additional equity awards granted to our executive officers
in 2015, other than our CFO, start vesting only after a significant portion of each executive's outstanding equity awards have vested.
The compensation & governance committee believes that these deferred vesting schedules make the equity awards more valuable
to us in retaining our executive officers and reflect our emphasis on our long-term success. In the case of our CFO, the compensation
& governance committee determined that it was appropriate not to defer the vesting start date for Mr. Wehner’s 2015 RSU grant in
order to increase his total compensation to a level appropriate for his new role as CFO. Typically the RSU grants for our executive
officers vest over four years following the vesting start date. The compensation and governance committee determined that it was
appropriate to shorten the vesting schedule for Ms. Sandberg and lengthen the vesting for Mr. Wehner based on individual
circumstances described below. For more information relating to the vesting schedules of these RSU grants, see “—2015 Grants of
Plan-Based Awards Table” below.
2015 Equity Grants. Mr. Zuckerberg did not receive any additional equity grants in 2015 because our compensation &
governance committee believed that his existing equity ownership position sufficiently aligns his interests with those of our
stockholders.
Our other named executive officers received the following RSU grants in 2015:
Sheryl K. Sandberg. Ms. Sandberg received an equity grant in the amount of 198,100 RSUs. This grant had an initial equity
value of $15.0 million. These RSUs are subject to three-year quarterly vesting based on continued employment from and after a
deferred vesting start date of November 15, 2017. The compensation & governance committee determined that it was appropriate
for this RSU grant to vest over three years in order to deliver competitive compensation in future years.
David M. Wehner. Mr. Wehner received an equity grant in the amount of 198,100 RSUs. This grant had an initial equity
value of $15.0 million. These RSUs are subject to five-year vesting with a one-year cliff based on continued employment from and
after a vesting start date of February 15, 2015, such that one-fifth of the shares shall vest on February 15, 2016 and the remainder
18
of the shares shall vest quarterly thereafter. The compensation & governance committee determined that it was appropriate for this
RSU grant to vest over five years to increase the retentive power of this grant.
Christopher K. Cox. Mr. Cox received an equity grant in the amount of 132,070 RSUs. This grant had an initial equity value
of $10.0 million. These RSUs are subject to four-year quarterly vesting based on continued employment from and after a deferred
vesting start date of February 15, 2017.
Mike Schroepfer. Mr. Schroepfer received an equity grant in the amount of 132,070 RSUs. This grant had an initial equity
value of $10.0 million. These RSUs are subject to four-year quarterly vesting based on continued employment from and after a
deferred vesting start date of February 15, 2017.
Following the grants of these equity awards, the total compensation for our named executive officers, other than our CEO,
was between the 50th and 90th percentiles relative to the companies in our Peer Group.
Compensation Governance
The compensation & governance committee seeks to ensure sound executive compensation practices to adhere to our pay-
for-performance philosophy while appropriately managing risk and aligning our compensation programs with long-term stockholder
interests. The following practices were in effect during 2015:
•
•
•
the compensation & governance committee is comprised solely of independent directors;
the compensation & governance committee conducts an annual review and approval of our compensation strategy with
assistance from its independent compensation consultant, Compensia, including a review of our compensation-related
risk profile to ensure that our compensation-related risks are not reasonably likely to have a material adverse effect on
our company;
the compensation & governance committee retains discretion on bonus payouts to enable it to respond to unforeseen
events and adjust bonus payouts as appropriate;
• we do not offer post-employment benefits; and
•
our compensation philosophy and related governance features are complemented by several specific practices that are
designed to align our executive compensation with long-term stockholder interests, including the following:
our executives are subject to company-wide policies that prohibit hedging activities, the pledging of our securities
as collateral for loans, and the shorting of our securities;
we offer limited perquisites that are for business-related purposes or necessary for the security of our CEO and
COO; and
our executives participate in broad-based company-sponsored health and welfare benefits programs on the same
basis as our other full-time, salaried employees.
Perquisites and Other Benefits
Consistent with the practices of many companies in our Peer Group, we provide certain perquisites to our named executive
officers for the reasons described below.
Because of the high visibility of our company, our compensation & governance committee has authorized an “overall
security program” for Mr. Zuckerberg to address safety concerns due to specific threats to his safety arising directly as a result of
his position as our founder, Chairman, and CEO. We require these security measures for the company's benefit because of the
importance of Mr. Zuckerberg to Facebook, and we believe that the costs of this overall security program are appropriate and
necessary. We paid for the initial procurement, installation, and maintenance of security measures for Mr. Zuckerberg's personal
residences, and we pay for the annual costs of security personnel. In addition, Mr. Zuckerberg uses private aircraft for personal travel
in connection with his overall security program. On certain occasions, Mr. Zuckerberg may be accompanied by guests when using
private aircraft. Although we do not consider Mr. Zuckerberg’s overall security program to be a perquisite for his benefit for the
19
reasons described above, the costs related to personal security for Mr. Zuckerberg at his residence and during personal travel, as well
as the costs of private aircraft for personal travel, pursuant to Mr. Zuckerberg’s overall security program are reported as other
compensation to Mr. Zuckerberg in the “All Other Compensation” column in “—2015 Summary Compensation Table” below.
Our compensation & governance committee has also authorized a security program for Ms. Sandberg, including certain
personal security measures, to address safety concerns resulting from her position as our COO. We require these security measures
for the company's benefit because of the importance of Ms. Sandberg to Facebook, and we believe the costs are appropriate and
necessary. The costs related to personal security for Ms. Sandberg are reported as other compensation to Ms. Sandberg in the “All
Other Compensation” column in “—2015 Summary Compensation Table” below.
2013 Say on Pay Vote
We held a non-binding advisory stockholder vote on the compensation program for our named executive officers, commonly
referred to as a “say on pay” vote, at our 2013 Annual Meeting of Stockholders. Over 90% of the voting power of shares voted at
the 2013 Annual Meeting of Stockholders were cast in favor of our say on pay proposal. Our then compensation committee considered
the result of this advisory vote to be an endorsement of our compensation program, policies, practices and philosophy for our named
executive officers. Our compensation & governance committee has considered and will continue to consider the outcome of our say
on pay votes and our stockholder views when making compensation decisions for our named executive officers.
Based on the results of a separate non-binding advisory stockholder vote on the frequency of future stockholder advisory
votes regarding the compensation program of our named executive officers, commonly referred to as a “say on frequency” vote,
held at our 2013 Annual Meeting of Stockholders, our board of directors determined that we will hold our say on pay vote every
three years until the next required say on frequency vote, which will occur no later than 2019.
We value the opinions of our stockholders and will continue to consider the outcome of future say on pay votes when we
make compensation decisions for the members of our executive team, including the named executive officers. The next say on pay
vote will take place at our 2016 Annual Meeting of Stockholders.
162(m) Tax Deductibility
Section 162(m) of the Internal Revenue Code of 1986, as amended (Code), limits the amount that we may deduct from our
federal income taxes for remuneration paid to our named executive officers (other than our CFO) to $1 million dollars per executive
officer per year, unless certain requirements are met. Section 162(m) provides an exception from this deduction limitation for certain
forms of “performance-based compensation,” as well as for the gain recognized by covered executive officers upon the exercise of
qualifying compensatory stock options. In addition, “grandfather” provisions may apply to certain compensation arrangements that
were entered into by a corporation before it was publicly held and through April 1, 2015. While our compensation & governance
committee is mindful of the benefit to us of the full deductibility of compensation, our compensation & governance committee
believes that it should not be constrained by the requirements of Section 162(m) where those requirements would impair flexibility
in compensating our executive officers in a manner that can best promote our corporate objectives. Therefore, our compensation &
governance committee has not adopted a policy that requires that all compensation be deductible and, accordingly, gain recognized
from RSUs granted after April 1, 2015 may be non-deductible. Our compensation & governance committee intends to continue to
compensate our executive officers in a manner consistent with the best interests of our company and our stockholders. In addition,
because of the fact-based nature of the performance-based compensation exception under Section 162(m) and the limited availability
of formal guidance thereunder, we cannot guarantee that any compensation arrangements intended to qualify for exemption under
Section 162(m) will actually receive this treatment.
Compensation Risk Assessment
Our management team and the compensation & governance committee each play a role in evaluating and mitigating any
risk that may exist relating to our compensation plans, practices, and policies for all employees, including our named executive
20
officers. In early 2016, Compensia, the compensation & governance committee's independent compensation consultant, performed
an assessment, in conjunction with management, of our compensation plans and practices and concluded that our compensation
program does not create risks that are reasonably likely to have a material adverse effect on the company. The compensation &
governance committee has reviewed this report and agreed with the conclusion. The objective of the assessment was to identify any
compensation plans or practices that may encourage employees to take unnecessary risk that could threaten the company. No such
plans or practices were identified. The risk assessment process included, among other things, a review of our cash and equity incentive-
based compensation plans to ensure that they are aligned with our company performance goals and the overall compensation to
ensure an appropriate balance between fixed and variable pay components and between short and long-term incentives.
21
Report of the Compensation & Governance Committee
This report of the compensation & governance committee is required by the Securities and Exchange Commission (SEC)
and, in accordance with the SEC’s rules, will not be deemed to be part of or incorporated by reference by any general statement
incorporating by reference our annual report on Form 10-K for the fiscal year ended December 31, 2015 into any filing under the
Securities Act of 1933, as amended (Securities Act), or under the Securities Exchange Act of 1934, as amended (Exchange Act),
except to the extent that we specifically incorporate this information by reference, and will not otherwise be deemed “soliciting
material” or “filed” under either the Securities Act or the Exchange Act.
Our compensation & governance committee has reviewed and discussed the Compensation Discussion and Analysis required
by Item 402(b) of Regulation S-K with management and based on such review and discussions, the compensation & governance
committee recommended to our board of directors that the Compensation Discussion and Analysis be included in our annual report
on Form 10-K for the fiscal year ended December 31, 2015.
THE COMPENSATION & GOVERNANCE COMMITTEE
Reed Hastings (Chair)
Marc L. Andreessen
Peter A. Thiel
22
2015 Summary Compensation Table
The following table presents summary information regarding the total compensation awarded to, earned by, or paid to each
of the named executive officers for services rendered to us for the years ended December 31, 2015, 2014, and 2013.
Name and Principal
Position
Mark Zuckerberg
CEO
Sheryl K. Sandberg
COO
David M. Wehner(6)
CFO
Christopher K. Cox(7)
CPO
Mike Schroepfer
CTO
Fiscal Year
2015
2014
2013
2015
2014
2013
2015
2014
2015
2014
2015
2014
2013
Salary
($)(1)
1
1
1
Bonus ($)(2)
—
—
—
Stock Awards
($)(3)
—
—
—
715,385
1,265,193
15,465,667
All Other Compensation
($)
5,037,840(4)
6,213,106(4)
3,300,452(4)
1,252,724(5)
Total ($)
5,037,841
6,213,107
3,300,453
18,698,969
592,885
384,423
665,385
418,051
639,423
533,654
639,423
535,577
352,060
624,204
603,967
653,365
535,077
894,141
898,991
943,360
979,021
358,764
14,332,313
15,158,758
15,465,667
11,024,750
10,310,705
11,024,750
10,310,705
11,024,750
11,842,776
— 15,549,402
— 16,147,148
9,000
16,793,417
9905
11,987,783
9,500
11,853,769
12750
12,470,145
9,140
9,164
4,683
11,902,628
12,548,512
12,558,283
_______________________________________
(1) Reflects actual earnings for 2015, 2014, and 2013, which may differ from approved 2015, 2014, and 2013 base salaries due
(2)
to the effective dates of salary increases.
The amounts reported in the bonus column represent discretionary bonuses earned pursuant to our Bonus Plan. For more
information about our executive officers’ discretionary bonuses, see “—Compensation Discussion and Analysis—Elements
of Executive Compensation—Cash Bonuses” above.
(4)
(3) Amounts reflect the aggregate grant date fair value of the RSUs of $78.07, $68.75, and $27.57 per share for 2015, 2014, and
2013, respectively, without regard to forfeitures, computed in accordance with ASC 718. This amount does not reflect the
actual economic value realized by the named executive officer. The RSUs granted to Ms. Sandberg during 2015 provide for
quarterly vesting based on continued employment over three years with a deferred vesting start date of November 15, 2017.
The RSUs granted to Messrs. Cox and Schroepfer during 2015 provide for quarterly vesting based on continued employment
over four years with deferred vesting start dates of February 15, 2017. One-fifth of the RSUs granted to Mr. Wehner during
2015 vested on February 15, 2016 and the remaining shares vest quarterly based on continued employment over four years.
The amounts reported include approximately $4,256,004, $5,602,652, and $2,647,288 in 2015, 2014, and 2013, respectively,
for costs related to personal security for Mr. Zuckerberg at his residences and during personal travel pursuant to Mr.
Zuckerberg’s overall security program. The amounts reported also include approximately $775,011, $610,454 and $650,164
in 2015, 2014, and 2013, respectively, for costs related to personal usage of private aircraft. For purposes of reporting the
value of personal usage of private aircraft in this table, we use costs provided by the applicable charter company, which include
passenger fees, fuel, crew and catering costs. For more information regarding Mr. Zuckerberg’s overall security program, as
well as his personal usage of private aircraft, see “—Executive Compensation—Compensation Discussion and Analysis—
Perquisites and Other Benefits.”
(5) The amounts reported in 2015 reflect costs related to personal security measures for Ms. Sandberg described in “—Executive
Compensation—Compensation Discussion and Analysis—Perquisites and Other Benefits.”
(6) Mr. Wehner was not a named executive officer for 2013.
(7) Mr. Cox was not a named executive officer for 2013.
23
2015 Grants of Plan-Based Awards Table
The following table presents, for each of the named executive officers, information concerning each grant of an equity
award made during the year ended December 31, 2015. This information supplements the information about these awards set forth
in the 2015 Summary Compensation Table.
Name
Mark Zuckerberg
Sheryl K. Sandberg
David M. Wehner
Christopher K. Cox
Mike Schroepfer
All Other Stock
Awards: Number of
Shares of
Stock or Units (#)
Grant Date Fair
Value of Stock
Awards ($)(1)
—
198,100(2)
198,100(3)
132,070(4)
132,070(4)
—
15,465,667
15,465,667
10,310,705
10,310,705
Grant Date
—
3/16/2015
3/16/2015
3/16/2015
3/16/2015
_______________________________________
(1) Amounts reflect the grant date fair value of the RSUs of $78.07 per share without regard to forfeitures, computed in accordance
(2)
(3)
with ASC 718. This amount does not reflect the actual economic value realized by the named executive officer.
The vesting condition will be satisfied as to 1/12th of the total shares underlying the RSUs on February 15, 2018. The remaining
shares underlying the RSUs vest at a rate of 1/12th of the total number of shares underlying the RSUs each quarter thereafter,
subject to continued service to us through each vesting date.
The vesting condition was satisfied as to 1/5th of the total shares underlying the RSUs on February 15, 2016. The remaining
shares underlying the RSUs vest at a rate of 1/20th of the total number of shares underlying the RSUs each quarter thereafter,
subject to continued service to us through each vesting date.
(4) The vesting condition will be satisfied as to 1/16th of the total shares underlying the RSUs on May 15, 2017. The remaining
shares underlying the RSUs vest at a rate of 1/16th of the total number of shares underlying the RSUs each quarter thereafter,
subject to continued service to us through each vesting date.
24
2015 Outstanding Equity Awards at Year-End Table
The following table presents, for each of the named executive officers, information regarding outstanding stock options
and RSUs held as of December 31, 2015.
Option Awards
Stock Awards
Name
Mark Zuckerberg
Grant Date(1)
—
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
—
Sheryl K.
Sandberg
7/23/2010
2,333,333
10/18/2010
173,333
David M. Wehner
Christopher K.
Cox
Mike Schroepfer
3/25/2011
5/3/2012
5/6/2013
3/17/2014
3/16/2015
1/15/2013
5/6/2013
3/17/2014
3/16/2015
8/26/2009
8/26/2010
3/25/2011
5/3/2012
5/6/2013
3/17/2014
3/16/2015
1/12/2009(23)
8/19/2009
8/26/2010
3/25/2011
5/3/2012
5/6/2013
3/17/2014
3/16/2015
—
—
—
—
—
—
—
—
—
—
—
—
—
968,425
1,091,148
—
—
—
—
—
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
—
1,166,667(4)
Option
Exercise
Price ($)
(2)
Option
Expiration
Date
—
—
10.39
7/22/2020
1,026,667(5)
—
15.00(6)
—
10/17/2020
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1.85
2.95
1/11/2019
8/18/2019
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Number of
Shares or
Units of
Stock That
Have Not
Vested (#)
—
—
—
599,521(7)
345,543(8)
549,828(9)
208,470(10)
198,100(11)
75,000(12)
42,960(13)
160,360(14)
198,100(15)
227,412(16)
519,505(17)
599,521(18)
545,957(19)
429,553(20)
160,360(21)
132,070(22)
—
—
865,845(24)
479,617(25)
375,346(26)
429,553(27)
160,360(28)
132,070(29)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested($)(3)
—
—
—
62,745,868
36,164,530
57,544,998
21,818,470
20,733,146
7,849,500
4,496,194
16,783,278
20,733,146
23,800,940
54,371,393
62,745,868
57,139,860
44,957,017
16,783,278
13,822,446
—
—
90,619,338
50,196,715
39,283,712
44,957,017
16,783,278
13,822,446
_____________________________________
(1) All of the outstanding equity awards described in the footnotes below were granted under our 2005 Stock Plan or 2012 Equity
Incentive Plan.
(2) With the exception of the stock option granted to Ms. Sandberg described in footnote (6) below, this column represents the
fair value of a share of Class B common stock on the date of grant.
25
(5)
(4)
(3) Represents the market value of the shares underlying the RSUs as of December 31, 2015, based on the official closing price
of our Class A common stock, as reported on the NASDAQ Global Select Market, of $104.66 per share on December 31,
2015. This value assumes that the fair market value of the Class B common stock underlying the RSUs, which is not listed
or approved for trading on or with any securities exchange or association, is equal to the fair market value of our Class A
common stock. Each share of Class B common stock is convertible into one share of Class A common stock at any time at
the option of the holder or upon certain transfers of such shares.
1/48th of the total number of shares subject to the original option grant vested on May 1, 2013. The remaining shares subject
to the option vest at a rate of 1/48th of the total number of shares subject to the option each month thereafter, subject to
continued service to us through each vesting date.
260,000 of the total number of shares subject to the original option grant vest in equal monthly installments for a period of
48 months beginning on May 1, 2013, and, thereafter, the remaining shares subject to the option vest in equal monthly
installments for a period of 12 months, subject to continued service to us through each vesting date.
The compensation committee set the option exercise price for this grant at $15.00 per share, a premium to the fair market
value of a share of Class B common stock on the date of grant which was determined by our compensation committee to be
$12.56 per share.
1/16th of the total shares underlying the original RSU grant vested on January 15, 2014. The remaining shares underlying
the RSUs vest at a rate of 1/16th of the total number of shares underlying the RSUs each quarter thereafter, subject to continued
service to us through each vesting date.
1/16th of the total shares underlying the original RSU grant vested on February 15, 2014. The remaining shares underlying
the RSUs vest at a rate of 1/16th of the total number of shares underlying the RSUs each quarter thereafter, subject to continued
service to us through each vesting date.
1/16th of the total shares underlying the RSUs will vest on February 15, 2018. The remaining shares underlying the RSUs
vest at a rate of 1/16th of the total number of shares underlying the RSUs each quarter thereafter, subject to continued service
to us through each vesting date.
(8)
(6)
(7)
(9)
(10) 1/16th of the total shares underlying the RSUs will vest on May 15, 2016. The remaining shares underlying the RSUs vest at
a rate of 1/16th of the total number of shares underlying the RSUs each quarter thereafter, subject to continued service to us
through each vesting date.
(11) 1/12th of the total shares underlying the RSUs will vest on February 15, 2018. The remaining shares underlying the RSUs
vest at a rate of 1/12th of the total number of shares underlying the RSUs each quarter thereafter, subject to continued service
to us through each vesting date.
(12) 1/4th of the total shares underlying the original RSU grant vested on November 15, 2013. The remaining shares underlying
the RSUs vest at a rate of 1/16th of the total number of shares subject to the RSUs each quarter thereafter, subject to continued
service to us through each vesting date.
(13) 1/16th of the total shares underlying the original RSU grant vested on February 15, 2014. The remaining shares underlying
the RSUs vest at a rate of 1/16th of the total number of shares subject to the RSUs each quarter thereafter, subject to continued
service to us through each vesting date.
(14) 1/16th of the total shares underlying the RSUs will vest on May 15, 2016. The remaining shares underlying the RSUs vest at
a rate of 1/16th of the total number of shares underlying the RSUs each quarter thereafter, subject to continued service to us
through each vesting date.
(15) 1/5th of the total shares underlying the original RSU grant vested on February 15, 2016. The remaining shares underlying
the RSUs vest at a rate of 1/20th of the total number of shares subject to the RSUs each quarter thereafter, subject to continued
service to us through each vesting date.
(16) 1/48th of the total number of shares subject to the original option grant vested on September 1, 2013. The remaining shares
subject to the option vest at a rate of 1/48th of the total number of shares subject to the option each month thereafter, subject
to continued service to us through each vesting date.
(17) 1/16th of the total shares underlying the original RSU grant vested on August 15, 2013. The remaining shares underlying the
RSUs vest at a rate of 1/16th of the total number of shares underlying the RSUs each quarter thereafter, subject to continued
service to us through each vesting date.
26
(18) 1/16th of the total shares underlying the original RSU grant vested on July 15, 2014. The remaining shares underlying the
RSUs vest at a rate of 1/16th of the total number of shares underlying the RSUs each quarter thereafter, subject to continued
service to us through each vesting date.
(19) 1/16th of the total shares underlying the RSUs will vest on February 15, 2017. The remaining shares underlying the RSUs
vest at a rate of 1/16th of the total number of shares underlying the RSUs each quarter thereafter, subject to continued service
to us through each vesting date.
(20) 1/16th of the total shares underlying the RSUs will vest on August 15, 2017. The remaining shares underlying the RSUs vest
at a rate of 1/16th of the total number of shares underlying the RSUs each quarter thereafter, subject to continued service to
us through each vesting date.
(21) 1/16th of the total shares underlying the RSUs will vest on May 15, 2016. The remaining shares underlying the RSUs vest at
a rate of 1/16th of the total number of shares underlying the RSUs each quarter thereafter, subject to continued service to us
through each vesting date.
(22) 1/16th of the total shares underlying the RSUs will vest on May 15, 2017. The remaining shares underlying the RSUs vest at
a rate of 1/16th of the total number of shares underlying the RSUs each quarter thereafter, subject to continued service to us
through each vesting date.
(23) In connection with certain estate planning transfers, options to purchase an aggregate of 763,000 shares of Class B common
stock were held by Michael Schroepfer and Erin Hoffman, Co-Trustees of the HS Trust u/a/d 9/28/11 and Michael T. Schroepfer
and Erin Hoffman, Co-Trustees of the Clover Irrevocable, Non-Exempt Trust u/a/d 6/27/11 as of December 31, 2015.
(24) 1/16th of the total shares underlying the original RSU grant vested on August 15, 2014. The remaining shares underlying the
RSUs vest at a rate of 1/16th of the total number of shares underlying the RSUs each quarter thereafter, subject to continued
service to us through each vesting date.
(25) 1/16th of the total shares underlying the original RSU grant vested on January 15, 2014. The remaining shares underlying
the RSUs vest at a rate of 1/16th of the total number of shares underlying the RSUs each quarter thereafter, subject to continued
service to us through each vesting date.
(26) 1/16th of the total shares underlying the original RSU grant vested on November 15, 2014. The remaining shares underlying
the RSUs vest at a rate of 1/16th of the total number of shares underlying the RSUs each quarter thereafter, subject to continued
service to us through each vesting date.
(27) 1/16th of the total shares underlying the RSUs will vest on February 15, 2018. The remaining shares underlying the RSUs
vest at a rate of 1/16th of the total number of shares underlying the RSUs each quarter thereafter, subject to continued service
to us through each vesting date.
(28) 1/16th of the total shares underlying the RSUs will vest on May 15, 2016. The remaining shares underlying the RSUs vest at
a rate of 1/16th of the total number of shares underlying the RSUs each quarter thereafter, subject to continued service to us
through each vesting date.
(29) 1/16th of the total shares underlying the RSUs will vest on May 15, 2017. The remaining shares underlying the RSUs vest at
a rate of 1/16th of the total number of shares underlying the RSUs each quarter thereafter, subject to continued service to us
through each vesting date.
On March 6, 2016, our compensation & governance committee approved RSU grants to our named executive officers.
These RSUs were granted on March 15, 2016 as follows: Sheryl K. Sandberg—179,890; David M. Wehner—134,920; Christopher
K. Cox—134,920; and Mike Schroepfer—134,920. These RSUs will vest quarterly based on continued employment over four years
with deferred vesting start dates of February 15, 2020 for Mr. Cox, November 15, 2019 for Mr. Schroepfer, May 15, 2019 for Ms.
Sandberg, and November 15, 2016 for Mr. Wehner.
27
2015 Option Exercises and Stock Vested
The following table presents, for each of the named executive officers, the number of shares of our common stock acquired
upon the exercise of stock options and the vesting and settlement of RSUs during 2015 and the aggregate value realized upon the
exercise of stock options and the vesting and settlement of RSUs.
Name
Mark Zuckerberg
Sheryl K. Sandberg
David M. Wehner
Christopher K. Cox
Mike Schroepfer
Option Awards
Stock Awards
Number of Shares
Acquired on
Exercise (#)
Value Realized on
Exercise ($)(1)(2)
Number of Shares
Acquired on
Vesting (#)
Value Realized on
Vesting ($)(1)(3)
—
—
—
—
637,000(4)
—
—
—
—
53,987,472
—
472,531
96,480
722,600
722,637
—
41,004,637
8,504,184
63,114,036
63,185,223
________________________________________
(1) These values assume that the fair market value of the Class B common stock underlying certain of the RSUs and options,
which is not listed or approved for trading on or with any securities exchange or association, is equal to the fair market value
of our Class A common stock. Each share of Class B common stock is convertible into one share of Class A common stock
at any time at the option of the holder or upon certain transfers of such shares.
(2) The aggregate value realized upon the exercise of an option represents the difference between the aggregate market price of
the shares of our Class B common stock, assumed to be equal to our Class A common stock as described in footnote (1) above,
on the date of exercise and the aggregate exercise price of the option.
The aggregate value realized upon the vesting and settlement of an RSU represents the aggregate market price of the shares
of our Class A common stock or Class B common stock (which is assumed to be equal to our Class A common stock as
described in footnote (1) above) on the date of settlement.
(3)
(4) Consists of 600,000 shares of Class B common stock issued upon exercise of stock options held by Mr. Schroepfer and 37,000
shares of Class B common stock issued upon exercise of stock options held by Mr. Schroepfer and Erin Hoffman, Co-Trustees
of the Clover Irrevocable, Non-Exempt Trust u/a/d 6/27/11 as of December 31, 2015.
28
Employment Agreements and Offer Letters
We have entered into employment agreements or offer letters with each of the named executive officers. These agreements
provide for at-will employment and generally include the named executive officer’s initial base salary, and an indication of eligibility
for an annual cash incentive award opportunity. In addition, each of our named executive officers has executed a form of our standard
confidential information and invention assignment agreement.
Mark Zuckerberg
We entered into an amended and restated offer letter with Mr. Zuckerberg, our founder, Chairman, and CEO, in January 2012.
This offer letter agreement has no specific term and constitutes at-will employment. Mr. Zuckerberg’s annual base salary as of
December 31, 2015 was $1, and he is not eligible to receive bonus compensation under our Bonus Plan.
Sheryl K. Sandberg
We entered into an amended and restated employment agreement with Ms. Sandberg, our COO and a member of our board
of directors, in January 2012. The employment agreement has no specific term and constitutes at-will employment. Ms. Sandberg’s
annual base salary as of December 31, 2015 was $700,000, and she is eligible to receive semi-annual bonus compensation under our
Bonus Plan.
David M. Wehner
We entered into an amended and restated offer letter with Mr. Wehner, our CFO, in August 2014. The offer letter agreement
has no specific term and constitutes at-will employment. Mr. Wehner’s annual base salary as of December 31, 2015 was $650,000,
and he is eligible to receive semi-annual bonus compensation under our Bonus Plan.
Christopher K. Cox
We entered into an amended and restated offer letter with Mr. Cox, our CPO, in May 2014. The offer letter agreement has
no specific term and constitutes at-will employment. Mr. Cox’s annual base salary as of December 31, 2015 was $625,000, and he
is eligible to receive semi-annual bonus compensation under our Bonus Plan.
Mike Schroepfer
We entered into an amended and restated offer letter with Mr. Schroepfer, our CTO, in January 2012. The offer letter
agreement has no specific term and constitutes at-will employment. Mr. Schroepfer’s annual base salary as of December 31, 2015
was $625,000, and he is eligible to receive semi-annual bonus compensation under our Bonus Plan.
Potential Payments upon Termination or Change in Control
None of our named executive officers are entitled to payments or acceleration of vesting with respect to equity awards held
by such named executive officers in connection with a termination or a change in control.
Limitations on Liability and Indemnification Matters
Our restated certificate of incorporation contains provisions that limit the liability of our directors for monetary damages
to the fullest extent permitted by the Delaware General Corporation Law. Consequently, our directors will not be personally liable
to us or our stockholders for monetary damages for any breach of fiduciary duties as directors, except liability for:
•
•
any breach of the director’s duty of loyalty to us or our stockholders;
any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
29
•
unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the
Delaware General Corporation Law; or
•
any transaction from which the director derived an improper personal benefit.
Our restated certificate of incorporation and amended and restated bylaws require us to indemnify our directors, executive
officers, and other key employees made or threatened to be made a party to an action or proceeding, by reason of the fact that he or
she serves or served in such capacity at our request to the maximum extent not prohibited by the Delaware General Corporation Law
or any other applicable law and allow us to indemnify other officers, employees, and other agents as set forth in the Delaware General
Corporation Law or any other applicable law.
We have entered, and intend to continue to enter, into separate indemnification agreements with our directors, executive
officers, and other key employees, in addition to the indemnification provided for in our amended and restated bylaws. These
agreements, among other things, require us to indemnify our directors, executive officers, and other key employees for certain
expenses, including attorneys’ fees, judgments, penalties fines, and settlement amounts actually and reasonably incurred by a director
or executive officer in any action or proceeding arising out of their services as one of our directors or executive officers, or any of
our subsidiaries or any other company or enterprise to which the person provides services at our request, including liability arising
out of negligence or active or passive wrongdoing by the officer or director. We believe that these charter provisions and
indemnification agreements are necessary to attract and retain qualified persons such as directors, officers and key employees. We
also maintain directors’ and officers’ liability insurance.
The limitation of liability and indemnification provisions in our restated certificate of incorporation and amended and
restated bylaws may discourage stockholders from bringing a lawsuit against our directors and officers for breach of their fiduciary
duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful,
might benefit us and other stockholders. Further, a stockholder’s investment may be adversely affected to the extent that we pay the
costs of settlement and damage awards against directors and officers as required by these indemnification provisions.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (Securities Act), may be
permitted to directors, executive officers or persons controlling us, we have been informed that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Rule 10b5-1 Sales Plans
Certain of our directors and executive officers have adopted written plans, known as Rule 10b5-1 plans, in which they will
contract with a broker to buy or sell shares of our common stock on a periodic basis. Under a Rule 10b5-1 plan, a broker executes
trades pursuant to parameters established by the director or executive officer when entering into the plan, without further direction
from them. The director or executive officer may amend or terminate the plan in specified circumstances. Our executive officers and
directors are required to conduct all purchase or sale transactions under a Rule 10b5-1 plan.
30
Director Compensation
Non-Employee Director Compensation Arrangements
Each non-employee member of our board of directors receives an annual retainer fee of $50,000. Members of our audit
committee (other than the chair) receive an annual retainer fee of $20,000, and the chair of our audit committee receives an annual
retainer fee of $50,000.
Each of our non-employee directors who is an existing member of our board of directors as of the date of our annual
stockholder meeting for each such year also will be eligible to receive an annual grant of RSUs equal to $300,000 divided by the
average daily closing price of our Class A common stock in May of such year. These awards will be approved each year automatically
on the later of June 1 or the date of our annual meeting of stockholders for the particular year. These awards will vest fully on the
earlier of (i) May 15 of the following year or (ii) the date of our annual meeting of stockholders of the following year if the director
does not stand for re-election or is not re-elected at such annual meeting, so long as the recipient is a director on such date.
In 2015, annual grants of 3,778 RSUs were made to each non-employee director, which is equal to $300,000 divided by
the average daily closing price of our Class A common stock in May 2015. These RSUs vest on May 15, 2016, so long as the non-
employee director is a member of our board of directors on such date.
New non-employee directors also will be eligible to receive a grant of RSUs in an amount and on terms to be approved by
our board of directors at the time of appointment.
2015 Director Compensation
The following table presents the total compensation for each person who served as a member of our board of directors
during 2015. Other than as set forth in the table and described more fully below, in 2015 we did not pay any fees to, make any equity
awards to, or pay any other compensation to the members of our board of directors who served as members during 2015. Mr.
Zuckerberg, Ms. Sandberg, and Mr. Koum do not receive compensation for their service as directors. Total compensation for Mr.
Zuckerberg and Ms. Sandberg for services as employees is presented in “—2015 Summary Compensation Table” above.
Director Name
Marc L. Andreessen(2)
Erskine B. Bowles(3)
Donald E. Graham(4)
Reed Hastings(5)
Susan Desmond-Hellmann(6)
Jan Koum(7)
Peter A. Thiel(8)
Fees Earned
or Paid in
Cash ($)
70,000
100,000
25,000
50,000
70,000
—
50,000
Stock Awards
($)(1)
304,922
304,922
—
304,922
304,922
—
304,922
All Other
Compensation
($)
Total ($)
—
—
—
—
—
1
—
374,922
404,922
25,000
354,922
374,922
1
354,922
__________________________________________
(1) Amounts reflect the aggregate grant date fair value of the RSUs without regard to forfeitures, computed in accordance with
ASC 718. This amount does not reflect the actual economic value realized by the director.
(2) As of December 31, 2015, Mr. Andreessen held 3,778 RSUs, which will vest on May 15, 2016 so long as Mr. Andreessen is a
member of our board of directors on such date.
(3) As of December 31, 2015, Mr. Bowles held 3,778 RSUs, which will vest on May 15, 2016 so long as Mr. Bowles is a member
of our board of directors on such date.
(4) Mr. Graham ceased service as a member of our board of directors on June 11, 2015.
31
(5) As of December 31, 2015, Mr. Hastings held 3,778 RSUs, which will vest on May 15, 2016 so long as Mr. Hastings is a member
of the board of directors on such date.
(6) As of December 31, 2015, Dr. Desmond-Hellmann held 10,445 RSUs. Of these RSUs, 6,250 will vest in quarterly installments
until February 15, 2017 and 417 RSUs will vest on May 15, 2017, subject to continued service to us through each vesting date,
and the remaining 3,778 RSUs will vest on May 15, 2016 so long as Dr. Desmond-Hellmann is a member of our board of
directors on such date.
(7) Represents annual salary of $1 for service as an employee. As of December 31, 2015, Mr. Koum held 19,468,550 RSUs, all of
which were granted to Mr. Koum in his capacity as an employee in connection with our acquisition of WhatsApp. Of these
RSUs, 9,941,387 RSUs will vest in equal quarterly installments until November 15, 2017, 7,456,040 RSUs will vest in equal
quarterly installments from November 15, 2017 until August 15, 2018, and the remaining 2,071,123 RSUs will vest on November
15, 2018, subject to continued service to us through each vesting date. Mr. Koum’s grant will accelerate in full if he is involuntarily
terminated without cause or resigns for good reason. Mr. Koum did not receive any compensation for his service as a director
in 2015.
(8) As of December 31, 2015, Mr. Thiel held 3,778 RSUs, which will vest on May 15, 2016 so long as Mr. Thiel is a member of
our board of directors on such date.
Compensation & Governance Committee Interlocks and Insider Participation
During 2015, our compensation & governance committee consisted of Messrs. Andreessen, Hastings, and Thiel. None of them
has at any time in the last fiscal year been one of our officers or employees. Moreover, none of our executive officers has served as
a member of the board of directors, or as a member of the compensation or similar committee, of any entity that has one or more
executive officers who served on our board of directors or compensation & governance committee during 2015.
32
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information with respect to the beneficial ownership of our common stock as of
March 31, 2016, for:
•
•
•
•
each stockholder known by us to be the beneficial owner of more than 5% of our outstanding shares of Class A common
stock or Class B common stock;
each of our directors;
each of our named executive officers; and
all of our directors and executive officers as a group.
We have determined beneficial ownership in accordance with the rules of the Securities and Exchange Commission (SEC).
Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named
in the following table have sole voting and investment power with respect to all shares of Class A common stock or Class B common
stock that they beneficially own, subject to applicable community property laws.
Applicable percentage ownership is based on 2,311,052,873 shares of Class A common stock and 548,638,840 shares of
Class B common stock outstanding at March 31, 2016. In computing the number of shares of common stock beneficially owned by
a person and the percentage ownership of that person, we deemed to be outstanding all shares of common stock subject to options,
restricted stock units (RSUs) or other convertible securities held by that person or entity that are currently exercisable or releasable
or that will become exercisable or releasable within 60 days of March 31, 2016. We did not deem these shares outstanding, however,
for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the address of each beneficial
owner listed in the following table is c/o Facebook, Inc., 1601 Willow Road, Menlo Park, California 94025.
33
Shares Beneficially Owned
Class A
Class B
Shares
%
Shares
%
Name of Beneficial Owner
Named Executive Officers and Directors:
Mark Zuckerberg(2)
Shares subject to voting proxy(3)
Total(2)(3)
Sheryl K. Sandberg(4)
David M. Wehner(5)
Christopher K. Cox(6)
Mike Schroepfer(7)
Marc L. Andreessen(8)
Erskine B. Bowles(9)
Susan D. Desmond-Hellmann(10)
Reed Hastings(11)
Jan Koum(12)
Peter A. Thiel(13)
All executive officers and directors as a group (13 persons)(14)
Other 5% Stockholders:
Dustin Moskovitz(15)
Eduardo Saverin(16)
Entities affiliated with BlackRock(17)
Entities affiliated with Fidelity(18)
Entities affiliated with Vanguard(19)
3,999,241
—
3,999,241
5,014,553
99,878
499,793
478,702
171,646
36,513
25,680
130,921
60,239,391
1,075,811
72,165,123
N/A(15)
5,900,000
126,420,664
150,655,575
130,370,552
% of Total
Voting
Power(1)
53.8
6.3
60.1
*
*
*
*
*
*
*
*
*
*
418,981,071
48,892,913
467,873,984
2,859,253
—
169,278
2,180,233
379,429
—
—
—
—
54,995
76.4
8.9
85.3
*
—
*
*
*
—
—
—
—
*
*
—
*
*
*
*
*
*
*
*
*
2.6
*
3.1
473,558,630
85.5
61.2
N/A(15)
*
48,892,913
47,233,360
5.5
6.5
5.6
—
—
—
8.9
8.6
—
—
—
6.3
6.1
1.6
1.9
1.7
___________________________________
*
(1)
Less than 1%.
Percentage of total voting power represents voting power with respect to all shares of our Class A common stock and Class B
common stock, as a single class. The holders of our Class B common stock are entitled to ten votes per share, and holders of
our Class A common stock are entitled to one vote per share.
(2) Consists of (i) 4,857,323 shares of Class B common stock held of record by Mark Zuckerberg, Trustee of The Mark Zuckerberg
Trust dated July 7, 2006 (2006 Trust); (ii) 3 shares of Class B common stock held of record by Mark Zuckerberg, Trustee of
the Openness Trust, dated April 2, 2012; (iii) 1,050,117 shares of Class A common stock held of record by Mark Zuckerberg,
Trustee of The Mark Zuckerberg 2014 GRAT No. 1 dated May 8, 2014; (iv) 1,224,587 shares of Class A common stock held
of record by Mark Zuckerberg, Trustee of The Mark Zuckerberg 2014 GRAT No. 2 dated May 8, 2014; (v) 1,278,591 shares
of Class A common stock held of record by Mark Zuckerberg, Trustee of The Mark Zuckerberg 2014 GRAT No. 3 dated May 8,
2014; and (vi) 445,946 shares of Class A common stock and 414,123,745 shares of Class B common stock held of record by
Chan Zuckerberg Initiative, LLC (CZI). The 2006 Trust is the sole member of CZI. Mr. Zuckerberg is the sole trustee of the
2006 Trust and, therefore, is deemed to have sole voting and investment power over the securities held by CZI.
(3) Consists of shares of our Class B common stock beneficially owned by Mr. Moskovitz over which, except under limited
circumstances, Mr. Zuckerberg holds an irrevocable proxy, pursuant to a voting agreement between Mr. Zuckerberg, us, and
Mr. Moskovitz with respect to certain matters, as indicated in footnote (15) below. We do not believe that the parties to the
voting agreement constitute a “group” under Section 13 of the Securities Exchange Act of 1934, as amended, as Mr. Zuckerberg
exercises voting control over these shares.
(4) Consists of (i) 4,977,700 shares of Class A common stock held of record by Ms. Sandberg; (ii) 23,824 shares of Class A common
stock held of record by Sheryl K. Sandberg, Trustee of the Sandberg-Goldberg Family Trust dated September 3, 2004; (iii)
2,741,120 shares of Class B common stock issuable upon exercise of options exercisable within 60 days of March 31, 2016;
34
and (iv) 13,029 shares of Class A common stock and 118,133 shares of Class B common stock issuable upon the settlement
of RSUs releasable within 60 days of March 31, 2016.
(5) Consists of (i) 55,831 shares of Class A common stock held of record by Mr. Wehner and (ii) 44,047 shares of Class A common
stock issuable upon the settlement of RSUs releasable within 60 days of March 31, 2016.
(6) Consists of (i) 384,010 shares of Class A common stock held of record by Mr. Cox; (ii) 76,945 shares of Class A common
stock held of record by Christopher Cox, Trustee of the Christopher K. Cox Revocable Trust; (iii) 28,816 shares of Class A
common stock held of record by the Remainder Interest Trust Created Under the Christopher K. Cox 2009 Annuity Trust dated
5/29/2009; and (iv) 10,022 shares of Class A common stock and 169,278 shares of Class B common stock issuable upon the
settlement of RSUs releasable within 60 days of March 31, 2016.
(7) Consists of (i) 468,680 shares of Class A common stock held of record by Mr. Schroepfer; (ii) 26,940 shares of Class B common
stock held by Mr. Schroepfer and Erin Hoffmann as Co-Trustees of The Clover Irrevocable Nonexempt Trust u/a/d 6/27/11
which are issuable upon exercise of options exercisable within 60 days of March 31, 2016; (iii) 676,060 shares of Class B
common stock held by Mr. Schroepfer and Erin Hoffmann as Co-Trustees of the HS Trust u/a/d 9/28/11 which are issuable
upon exercise of options exercisable within 60 days of March 31, 2016; (iv) 1,296,573 shares of Class B common stock issuable
upon exercise of options exercisable within 60 days of March 31, 2016; and (v) 10,022 shares of Class A common stock and
180,660 shares of Class B common stock issuable upon the settlement of RSUs releasable within 60 days of March 31, 2016.
(8) Consists of (i) 167,868 shares of Class A common stock held of record by The Andreessen 1996 Living Trust (Andreessen
Living Trust); (ii) 3,778 shares of Class A common stock issuable upon the settlement of RSUs releasable within 60 days of
March 31, 2016; (iii) 224,239 shares of Class B common stock to be received by Andreessen Horowitz Fund III, L.P., as
nominee (AH Fund), in connection with our acquisition of Oculus VR, Inc. (Oculus); and (iv) 155,190 shares of Class B
common stock to be received by AH Parallel Fund III, L.P., as nominee (AHPF), in connection with our acquisition of Oculus.
The shares to be received by AH Fund and AHPF are currently being held in escrow and are subject to forfeiture during the
escrow period stated to satisfy claims arising as a result of, among other things, Oculus’ breach of any of its representations
and warranties or covenants and agreements set forth in the amended and restated agreement and plan of merger dated April
21, 2014. Mr. Andreessen has irrevocably committed to cause all shares of Class B common stock that may be received by
AH Fund and AHPF upon release of such escrow into Class A common stock. Mr. Andreessen and JPMorgan Chase Bank,
N.A. (successor-in-interest to J.P. Morgan Trust Company, N.A.) are the trustees of the Andreessen Living Trust, and may be
deemed to share voting and investment power over the securities held by the Andreessen Living Trust. AH Equity Partners III,
L.L.C. (AHEP) is the general partner of AH Fund. Mr. Andreessen is one of the managing members of AHEP and, therefore,
may be deemed to share voting and investment power over the securities held by AH Fund. AH Equity Partners III (Parallel),
L.L.C. (AHEP Parallel) is the general partner of AHPF. Mr. Andreessen is one of the managing members of AHEP Parallel
and, therefore, may be deemed to share voting and investment power over the securities held by AHPF. The address of
Andreessen Living Trust, AH Fund, and AHPF is 2865 Sand Hill Road, Suite 101, Menlo Park, California 94025.
(9) Consists of (i) 32,735 shares of Class A common stock held of record by Mr. Bowles and (ii) 3,778 shares of Class A common
stock issuable upon the settlement of RSUs releasable within 60 days of March 31, 2016.
(10) Consists of (i) 20,652 shares of Class A common stock held of record by Nicholas S. Hellmann and Susan D. Desmond-
Hellmann as the co-trustees of the Hellmann Family Trust and (ii) 5,028 shares of Class A common stock issuable upon the
settlement of RSUs releasable within 60 days of March 31, 2016.
(11) Consists of (i) 79,297 shares of Class A common stock held of record by Mr. Hastings; (ii) 47,846 shares of Class A common
stock held of record by the Hastings-Quillin Family Trust dated 05/13/1996 (Hastings Trust); and (iii) 3,778 shares of Class
A common stock issuable upon the settlement of RSUs releasable within 60 days of March 31, 2016. Mr. Hastings is one of
the trustees of the Hastings Trust.
(12) Consists of (i) 39,942,725 shares of Class A common stock held of record by Jan Koum, Trustee of the Butterfly Trust U/A/
D 1/20/2004; (ii) 141,489 shares of Class A common stock held of record by Jan Koum, Trustee of the Jan Koum Trust I U/
A/D 4/29/2014; (iii) 141,489 shares of Class A common stock held of record by Jan Koum, Trustee of the Jan Koum Trust II
U/A/D 8/5/2014; (iv) 2,528,672 shares of Class A common stock held of record by Jan Koum, Trustee of the Jan Koum Trust
III U/A/D 10/9/2014; (v) 2,242,343 shares of Class A common stock held of record by Jan Koum, Trustee of the Jan Koum
Trust IV U/A/D 2/4/2015; (vi) 3,500,000 shares of Class A common stock held of record by Jan Koum, Trustee of the Jan
Koum Trust V U/A/D 4/29/2015; (vii) 3,500,000 shares of Class A common stock held of record by Jan Koum, Trustee of the
35
Jan Koum Trust VI U/A/D 8/5/2015; (viii) 3,500,000 shares of Class A common stock held of record by Jan Koum, Trustee
of the Jan Koum Trust VII U/A/D 10/20/2015; (ix) 3,500,000 shares of Class A common stock held of record by Jan Koum,
Trustee of the Jan Koum Trust VIII U/A/D 1/29/2016; and (x) 1,242,673 shares of Class A common stock issuable upon the
settlement of RSUs releasable within 60 days of March 31, 2016.
(13) Consists of (i) 1,072,033 shares of Class A common stock held of record by Rivendell One LLC (Rivendell); (ii) 3,778 shares
of Class A common stock issuable upon the settlement of RSUs releasable within 60 days of March 31, 2016; (iii) 41,631
shares of Class B common stock to be received by The Founders Fund IV, LP (FF) in connection with our acquisition of Oculus;
and (iv) 13,364 shares of Class B common stock to be received by The Founders Fund IV Principals Fund, LP (FFPF) in
connection with our acquisition of Oculus. The shares to be received by FF and FFPF are currently being held in escrow and
are subject to forfeiture during the escrow period stated to satisfy claims arising as a result of, among other things, Oculus’
breach of any of its representations and warranties or covenants and agreements set forth in the amended and restated agreement
and plan of merger dated April 21, 2014. Mr. Thiel is the beneficial owner of Rivendell and has voting and investment power
over the securities held by Rivendell. Mr. Thiel is one of the managers of the general partner of each of FF and FFPF, and,
therefore, may be deemed to have voting and investment power over the securities held by these entities.
(14) Consists of (i) 70,784,225 shares of Class A common stock; (ii) 468,308,408 shares of Class B common stock; (iii) 4,740,693
shares of Class B common stock issuable upon exercise of options exercisable within 60 days of March 31, 2016; and (iv)
1,380,898 shares of Class A common stock and 509,529 shares of Class B common stock issuable upon the settlement of RSUs
releasable within 60 days of March 31, 2016.
(15) Consists of 42,062,058 shares of Class B common stock held of record by Dustin A. Moskovitz, Trustee of The Dustin A.
Moskovitz Trust dated December 27, 2005 (Moskovitz 2005 Trust) and 6,830,855 shares of Class B common stock held of
record by Dustin Moskovitz, Trustee of The Dustin Moskovitz 2008 Annuity Trust dated March 10, 2008 (Moskovitz 2008
Trust). Mr. Moskovitz is trustee, co-trustee or beneficiary of the Moskovitz 2005 Trust and the Moskovitz 2008 Trust. The
address of Mr. Moskovitz is 224 Jackson Street, Suite 300, San Francisco, California 94111. All of the shares held by the
Moskovitz 2005 Trust and the Moskovitz 2008 Trust are subject to a voting agreement in favor of Mr. Zuckerberg referred to
in footnote (3) above. Mr. Moskovitz did not respond to our request for ownership information with respect to our Class A
common stock in connection with the preparation of this disclosure and we are not affiliated with Mr. Moskovitz or any other
person that has access to such ownership information, so this disclosure is based on information obtained from our transfer
agent and other information available to us as of March 31, 2016.
(16) Consists of 5,900,000 shares of Class A common stock and 47,233,360 shares of Class B common stock held of record by
Eduardo Saverin. The address of Mr. Saverin is c/o 9 Raffles Place, #42-02 Republic Plaza, Singapore 048619.
(17) Based on information reported by BlackRock, Inc. on Schedule 13G filed with the SEC on January 26, 2016. Of the shares of
Class A common stock beneficially owned, BlackRock, Inc. reported that it has sole dispositive power with respect to
126,331,177 shares, shared dispositive power with respect to 89,487shares, sole voting power with respect to 109,415,876
shares, and shared voting power with respect to 89,487 shares. BlackRock, Inc. listed its address as 55 East 52nd Street, New
York, New York 10055.
(18) Based on information reported by FMR LLC on Schedule 13G/A filed with the SEC on February 12, 2016. Of the shares of
Class A common stock beneficially owned, FMR LLC reported that is has sole dispositive power with respect to all of the
shares and sole voting power with respect to 13,411,812 shares. FMR LLC listed its address as 245 Summer Street, Boston,
Massachusetts 02210.
(19) Based on information reported by The Vanguard Group on Schedule 13G filed with the SEC on February 10, 2016. Of the
shares of Class A common stock beneficially owned, The Vanguard Group reported that it has sole dispositive power with
respect to 125,954,634 shares, shared dispositive power with respect to 4,415,918 shares, sole voting power with respect to
4,177,030 shares, and shared voting power with respect to 212,800 shares. The Vanguard Group listed its address as 100
Vanguard Blvd., Malvern, Pennsylvania 19355.
36
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes compensation plans under which our equity securities are authorized for issuance as of
December 31, 2015.
Plan Category
Equity compensation plans approved by security
holders(2)
Equity compensation plans not approved by security
holders(3)
(a)
Total Number of
Securities to be Issued
Upon Exercise of
Outstanding Options,
Warrants
and Rights
(b)
Weighted-average
Exercise Price Of
Outstanding
Options, Warrants
and Rights($)(1)
(c)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
95,497,130
29,355,630
7.10
N/A
98,465,884
N/A
____________________________________
(1) The weighted-average exercise price does not reflect the shares that will be issued in connection with the settlement of RSUs,
(2)
since RSUs have no exercise price.
Prior to our initial public offering, we granted awards under our 2005 Stock Plan. Following our initial public offering, we
granted awards under our 2012 Equity Incentive Plan.
(3) Consists of shares of Class A common stock issuable upon the settlement of non-plan RSU awards made pursuant to Section 5635
(c)(4) of the NASDAQ rules to two employees in connection with the commencement of their service to us following our
acquisition of WhatsApp.
37
Item 13. Certain Relationship and Related Transactions, and Director Independence
Since January 1, 2015, aside from the executive officer and director compensation arrangements discussed in Part III, Item 11,
“Executive Compensation” above, we did not have any transactions to which we have been a participant, in which the amount involved
in the transaction exceeds or will exceed $120,000 and in which any of our directors, executive officers or holders of more than 5% of
our capital stock, or any immediate family member of, or person sharing the household with, any of these individuals, had or will have
a direct or indirect material interest. Notwithstanding the foregoing, in 2015, related entities of certain of our directors and executive
officers, or their immediate family members, purchased and received credits to purchase advertising from us in the ordinary course of
business pursuant to our standard terms and conditions.
Review, Approval or Ratification of Transactions with Related Parties
We have adopted a related-party transactions policy to comply with Section 404 of the Securities Exchange Act of 1934, as
amended, under which our executive officers, directors, nominees for election as a director, beneficial owners of more than 5% of any
class of our common stock, and any members of the immediate family of any of the foregoing persons are not permitted to enter into a
related-party transaction with us without the consent of our audit committee. If the related party is, or is associated with, a member of
our audit committee, the transaction must be reviewed and approved by our compensation & governance committee. Any request for us
to enter into a transaction with a related party must first be presented to our legal department for review. Our legal department then refers
any transaction with a related party in which the amount involved exceeds $120,000 and such party would have a direct or indirect material
interest to our audit committee for review, consideration and approval. If advance approval of a transaction between a related party and
our company was not feasible or was not obtained, the transaction must be submitted to the legal department for review as soon as
reasonably practicable for determination of whether the transaction constituted a related-party transaction. The legal department then
refers such transaction to the audit committee, at which time the audit committee considers whether to ratify and continue, amend and
ratify, or terminate or rescind such related-party transaction. All of the transactions described above, including transactions in which the
related party did not have a material interest, were reviewed and considered by, and were entered into with the approval of, or ratification
by, our audit committee.
Board Independence
The rules of NASDAQ generally require that a majority of the members of a listed company’s board of directors be independent.
Although we are a “controlled company” under the corporate governance rules of NASDAQ and, therefore, are not required to comply
with certain rules requiring director independence, we have nevertheless opted, under our corporate governance guidelines, to have a
majority of the members of our board of directors be independent and to have a compensation & governance committee comprised solely
of independent directors. Our board of directors has determined that none of our non-employee directors has a relationship that would
interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is
“independent” as that term is defined under the rules of NASDAQ.
38
Item 14. Principal Accounting Fees and Services
The following table sets forth the aggregate fees for audit and other services provided by our independent registered public
accounting firm, Ernst & Young LLP, for the years ended December 31, 2015 and 2014 (in thousands):
Audit fees(1)
Audit-related fees(2)
Tax fees(3)
All other fees(4)
Total fees
2015
2014
6,774
$
257
4,989
132
6,206
80
5,326
66
12,152
$
11,678
$
$
_________________________________
(1) Audit fees consist of the aggregate fees billed for professional services rendered for (i) the audit of our annual financial
statements included in our Annual Report on Form 10-K and a review of financial statements included in our Quarterly Reports
on Form 10-Q, (ii) the filing of our registration statements, including our Registration Statements on Form S-3 in October
2014, (iii) services that are normally provided in connection with statutory and regulatory filings or engagements for those
years, and (iv) accounting consultations.
(2) Audit-related fees consist of service organization control examinations. Prior period has been reclassified to conform to current
(3)
year presentation.
Tax fees in 2015 include $2.7 million for tax compliance projects and $2.3 million for tax advisory projects. Tax fees in 2014
include $1.7 million for tax compliance projects and $3.6 million for tax advisory projects.
(4) All other fees consist of fees for services other than the services reported in audit fees, audit-related fees, and tax fees.
The audit committee's policy is to pre-approve all audit and permissible non-audit services provided by the independent
accountants. These services may include audit services, audit-related services, tax services, and other services. The audit committee
generally pre-approves particular services or categories of services on a case-by-case basis. The independent registered public
accounting firm and management are required to periodically report to the audit committee regarding the extent of services provided
by the independent registered public accounting firm in accordance with these pre-approvals, and the fees for the services performed
to date.
All of the services of Ernst & Young LLP for 2015 and 2014 described above were pre-approved by the audit committee.
39
PART IV
Item 15. Exhibits, Financial Statement Schedules
We have filed the following documents as part of this report:
1. Consolidated Financial Statements:
Reports of Independent Registered Public Accounting Firm*
Consolidated Balance Sheets*
Consolidated Statements of Income*
Consolidated Statements of Comprehensive Income*
Consolidated Statements of Stockholders' Equity*
Consolidated Statements of Cash Flows*
Notes to Consolidated Financial Statements*
2. Financial Statement Schedules
All schedules have been omitted because they are not required, not applicable, not present in amounts sufficient to
require submission of the schedule, or the required information is otherwise included.
3. Exhibits
See the Exhibit Index immediately following the signature page of this report.
*
Previously filed with our Annual Report on Form 10-K filed with the SEC on January 28, 2016, which is being
amended hereby.
40
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
Amendment No. 1 to this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURE
Date:
April 27, 2016
FACEBOOK, INC.
/s/ David M. Wehner
David M. Wehner
Chief Financial Officer
41
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1+
10.3(B)+
10.3(C)+
10.4+
10.5+*
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
EXHIBIT INDEX
Exhibit Description
Form
File No.
Exhibit
Filing Date
Incorporated by Reference
Filed
Herewith
Restated Certificate of Incorporation.
10-Q
001-35551
Amended and Restated Bylaws.
10-Q
001-35551
3.1
3.2
Form of Class A Common Stock Certificate.
Form of Class B Common Stock Certificate.
Sixth Amended and Restated Investors' Rights
Agreement, dated December 27, 2010, by and
among Registrant and certain security holders of
Registrant.
Amendment No. 1 to Sixth Amended and
Restated Investors' Rights Agreement, dated May
1, 2012, by and among Registrant and certain
security holders of Registrant.
Form of “Type 1” Holder Voting Agreement,
between Registrant, Mark Zuckerberg, and
certain parties thereto.
Form of Indemnification Agreement.
S-1
S-8
S-1
333-179287
4.1
333-181566
4.4
333-179287
4.2
S-1
333-179287
4.3
S-1
333-179287
10.1
S-1
333-179287
4.2A May 3, 2012
10.2(A)+
2005 Stock Plan, as amended.
10-K
001-35551
10.2(B)+
2005 Stock Plan forms of award agreements.
S-1
333-179287
10.3(A)+
2012 Equity Incentive Plan, as amended.
10-K
001-35551
2012 Equity Incentive Plan forms of award
agreements.
2012 Equity Incentive Plan forms of award
agreements (Additional Forms).
Form of Non-Plan Restricted Stock Unit Award
Notice and Award Agreement
2015 Bonus Plan.
Amended and Restated Offer Letter, dated
January 27, 2012, between Registrant and Mark
Zuckerberg.
Amended and Restated Employment Agreement,
dated January 27, 2012, between Registrant and
Sheryl K. Sandberg.
Amended and Restated Offer Letter, dated May
2, 2014, between Registrant and Christopher
Cox.
Amended and Restated Offer Letter, dated
January 27, 2012, between Registrant and
Mike Schroepfer.
10-Q
001-35551
10-K
001-35551
S-8
333-199172
S-1
333-179287
10.6
S-1
333-179287
10.7
10-K
001-35551
10.8
S-1
333-179287
10.9
Offer Letter, dated August 25, 2014, between
Registrant and David M. Wehner.
10-K
001-35551
10.10
Offer Letter, dated October 6, 2014, between
Registrant and Jan Koum.
10-Q
001-35551
10.1
42
10.2
(A)
10.2
10.4
(A)
10.2
10.3
(C)
99.1
July 31, 2012
July 31, 2012
February 8,
2012
May 21, 2012
February 8,
2012
February 8,
2012
February 8,
2012
February 1,
2013
February 8,
2012
February 1,
2013
July 31, 2012
January 29,
2015
October 6, 2014
February 8,
2012
February 8,
2012
January 29,
2015
February 8,
2012
January 29,
2015
October 30,
2014
February 8,
2012
August 15,
2013
X
X
10.12†
Lease, dated February 7, 2011, between
Registrant and Wilson Menlo Park Campus, LLC.
S-1
333-179287
10.11
8-K
001-35551
10.1
10.13
21.1*
23.1*
31.1*
31.2*
31.3
31.4
32.1**
32.2**
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
Credit Agreement, dated August 15, 2013,
between Registrant, the Lenders party thereto,
and JPMorgan Chase Bank, N.A., as
Administrative Agent.
List of subsidiaries.
Consent of Independent Registered Public
Accounting Firm.
Certification of Mark Zuckerberg, Chief
Executive Officer, pursuant to Rule 13a-14
(a)/15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Certification of David M. Wehner, Chief
Financial Officer, pursuant to Rule 13a-14
(a)/15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Certification of Mark Zuckerberg, Chief
Executive Officer, pursuant to Rule 13a-14
(a)/15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Certification of David M. Wehner, Chief
Financial Officer, pursuant to Rule 13a-14
(a)/15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Certification of Mark Zuckerberg, Chief
Executive Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Certification of David M. Wehner, Chief
Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
XBRL Instance Document.
XBRL Taxonomy Extension Schema Document.
XBRL Taxonomy Extension Calculation
Linkbase Document.
XBRL Taxonomy Extension Definition Linkbase
Document.
XBRL Taxonomy Extension Labels Linkbase
Document.
XBRL Taxonomy Extension Presentation
Linkbase Document.
+ Indicates a management contract or compensatory plan.
† Portions of exhibit have been granted confidential treatment by the SEC.
* Previously filed with our Annual Report on Form 10-K filed with the SEC on January 28, 2016.
** Previously furnished with our Annual Report on Form 10-K filed with the SEC on January 28, 2016.
43
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