Facebook’s IPO Filing: 5 Things We Know Now

Facebook filed for an initial public offering with the U.S. Securities and Exchange Commission Wednesday, for the first time doing a public financial strip tease.

That's what's needed to obtain public investment as well as satisfy regulators who may raise questions. Last year, highly anticipated IPOs by the likes of Groupon and Facebook partner Zynga were delayed for months in Washington as their boards had to deal with precisely these issues.

Facebook, based in Menlo Park, Calif., has never revealed anything about its financial operations except to announce membership numbers - 800 million, or nearly triple the U.S. population, or 11 percent of global population. The filing said it has 845 million members.

Here are five things we learned from the IPO:

Who owns the company? Since Mark Zuckerberg, now 27, established it in 2004, shares have been sold to insiders, such as Tyler and Cameron Winklevoss and Eduardo Saverin, whose characters were depicted in The Social Network, but there are others including Hong Kong tycoon Li Ka-shing, PayPal founder Peter Thiel, LinkedIn CEO Reid Hoffman and Zynga CEO Mark Pincus.

Then there are venture capital investors, including Accel Partners, Greylock Ventures and Kleiner Perkins Caufield & Byers; investment banks such as Goldman Sachs, and corporations including Microsoft and Russia's Digital Sky Technologies.

The prospectus specifies who owns what and how much. Zuckerberg, for one, apparently sold $100 million worth of shares in 2010 to donate cash to the Newark, N.J. school system.

Key: Zuckerberg owns about 28 percent of the company outright but by creating a special class of stock, will retain majority control. Chief Operating Office Sheryl Sandberg has about 1 percent of the common shares and owns options worth plenty.

Zuck's share, assuming the IPO price is $53, could be valued at $28 billion, with Sandberg's at $1.6 billion, before options.

What kind of revenue does Facebook generate? Facebook's 2011 revenue was only about $3.7 billion but net income was about $1 billion. About 90 percent of revenue came from display ads with the remainder from games from its partner, Zynga, played on Facebook. By comparison, Google reported 2011 revenue of $37.9 billion, up 29 percent, while Yahoo reported revenue fell 21 percent, to $4.98 billion.

How sticky is Facebook and what kind of revenue is generated from advertisers? eMarketer, a research company, estimated Facebook's 2011 revenue was $4.27 billion, with 88 percent derived from advertising.

Given that Facebook has 845 million accounts, the revenue figure looks low. Per-user revenue was about $5.10 last year, based on the average of 725 million users. Google generates $27 per user!

Comscore, another researcher, reported Facebook's share of the 2011 market for display ads rose to 27.9 percent from 21 percent in 2010. Yahoo had about 11 percent, with both Google and Microsoft holding below 5 percent shares.

Facebook detailed how many daily clicks are generated from its users, especially the heavy ones, as well as specified some of its traffic. Still, whatever value is pegged for its shares, it will have to reflect some of these numbers.

Google shares, trading Thursday at $580.83, value the Mountain View, Calif.-based company at $188.8 billion. Their price-earnings ratio is 19.51.

Yahoo shares, trading at $15.73, value the Sunnyvale, Calif.-based company at $19.5 billion and a price-earnings ratio of 19.19. Of course, given Yahoo's recent history, investors including Daniel Loeb's Third Point Capital, believe Yahoo's current price masks billions of untapped assets in foreign investments.

By contrast, shareholder Microsoft's market value is $250 billion and its price-earnings ratio is 10.82.

Facebook, if it were to raise $5 billion in the IPO, would have a market value of $100 billion. But if its annual income is only $1 billion, its price-earnings ratio would be a lofty 100 percent!

How profitable is Facebook? The question is what kind of business is Facebook? While the company must spend heavily on technology and software to keep its sites up constantly, with engineers as well as server farms, its costs should not be that high.

Still, is Facebook a software company? A networker? An advertiser? How about its role in games and e-commerce?

Google, for example, is hugely profitable. Its gross margins, or revenue less total costs and expenses, is 69 percent. Yahoo's is the same. Microsoft's, for the year ended June 30, was 61 percent.

Zynga, for the nine months ended Sept. 30, reported gross margins of 65 percent.

Facebook's gross margin is about 67 percent, right in the ballpark.

Where will future growth come from and what's the competition? Nobody will want to invest in Facebook without hope of making money. Obviously, investors want to know how Zuckerberg will double and triple membership? At what cost? And how will that affect ads and e-commerce?

How do you grow a company that already reaches 845 million?

How about challengers? Google reported signing up 90 million members to rival Google+ in just the second half of 2011. At that pace, the number now may exceed 115 million. LinkedIn, the professional social networking site, reported 131 million members in the third quarter, a 63 percent gain over 2010.

The filing cites competition from Google, Twitter and companies that haven't yet established themselves as future challenges.

Perhaps unappreciated is that Facebook knows a whole lot about its 845 million members and that data is valuable to advertisers and others. Zuckerberg could use it to launch media ventures, network and other businesses, maybe even create a global bank of e-commerce. The company acknowledged dealings with the U.S. Federal Trade Commission over user privacy and monitoring it was required to institute.

Who'll manage the deal? Morgan Stanley won the mandate, with Goldman Sachs, JP Morgan Chase, Barclays Capital and Allen & Co.

While the management doesn't mean much for individuals, whoever handles the IPO matters a lot forZuckerberg and Facebook because it will have to deal with regulators, handle queries from big investors and ultimately run a roadshow.

To note: despite his letter about creating a social vehicle to change the world, Zuckerberg isn't offering Facebook members free shares or discounts on buying them.