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, 2019
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
20-1665019
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
1601 Willow Road, Menlo Park, California 94025
(Address of principal executive offices and Zip Code)
(650) 543-4800
(Registrant’s telephone number, including area code)
__________________________
Securities registered pursuant to Section 12(b) of the Act
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Class A Common Stock, $0.000006 par value
FB
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
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 every Interactive Data File required to be submitted 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 such files). Yes ? No ?
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
?
Accelerated filer
?
Non-accelerated filer
?
Smaller reporting company
?
Emerging growth company
?
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ?
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 28, 2019, the last business day of the registrant’s most recently
completed second fiscal quarter, was $478 billion based upon the closing price reported for such date on the Nasdaq Global Select Market. On January 23, 2020, the registrant
had 2,405,745,740 shares of Class A common stock and 444,704,919 shares of Class B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 2020 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,
2019.
Facebook, Inc.
Form 10-K
TABLE OF CONTENTS
Page
Note About Forward-Looking Statements
3
Limitations of Key Metrics and Other Data
4
PART I
Item 1.
Business
7
Item 1A.
Risk Factors
10
Item 1B.
Unresolved Staff Comments
38
Item 2.
Properties
38
Item 3.
Legal Proceedings
38
Item 4.
Mine Safety Disclosures
39
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
40
Item 6.
Selected Financial Data
42
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
44
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
67
Item 8.
Financial Statements and Supplementary Data
68
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
103
Item 9A.
Controls and Procedures
103
Item 9B.
Other Information
103
Item 10.
Directors, Executive Officers and Corporate Governance
104
Item 11.
Executive Compensation
104
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
104
Item 13.
Certain Relationships and Related Transactions, and Director Independence
104
Item 14.
Principal Accounting Fees and Services
104
Item 15.
Exhibits, Financial Statement Schedules
105
Item 16.
Form 10-K Summary
107
PART II
PART III
PART IV
Signatures
2
Table of Contents
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements. 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. The term “Family” refers to our Facebook, Instagram, Messenger, and WhatsApp products. For references to accessing Facebook or
our other products on the “web” or via a “website,” such terms refer to accessing such products on personal computers. For references to accessing Facebook or our
other products on “mobile,” such term refers to accessing such products via a mobile application or via a mobile-optimized version of our websites such as
m.facebook.com, whether on a mobile phone or tablet.
3
Table of Contents
LIMITATIONS OF KEY METRICS AND OTHER DATA
The numbers for our key metrics are calculated using internal company data based on the activity of user accounts. We have historically reported the
numbers of our daily active users (DAUs), monthly active users (MAUs), and average revenue per user (ARPU) (collectively, our “Facebook metrics”) based on
user activity only on Facebook and Messenger and not on our other products. Beginning with this Annual Report on Form 10-K, we also are reporting our
estimates of the numbers of our daily active people (DAP), monthly active people (MAP), and average revenue per person (ARPP) (collectively, our “Family
metrics”) based on the activity of users who visited at least one of Facebook, Instagram, Messenger, and WhatsApp (collectively, our “Family” of products) during
the applicable period of measurement. We believe our Family metrics better reflect the size of our community and the fact that many people are using more than
one of our products. As a result, over time we intend to report our Family metrics as our key metrics in place of DAUs, MAUs, and ARPU in our periodic reports
filed with the Securities and Exchange Commission.
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. The methodologies used to measure these metrics
require significant judgment and are also susceptible to algorithm or other technical errors. In addition, we are continually seeking to improve our estimates of our
user base, and such estimates may change due to improvements or changes in our methodology. We regularly review our processes for calculating these metrics,
and from time to time we discover inaccuracies in our metrics or make adjustments to improve their accuracy, which can result in adjustments to our historical
metrics. Our ability to recalculate our historical metrics may be impacted by data limitations or other factors that require us to apply different methodologies for
such adjustments. We generally do not intend to update previously disclosed Family metrics for any such inaccuracies or adjustments that are within the error
margins disclosed below.
In addition, our Facebook metrics and Family metrics estimates will differ from estimates published by third parties due to differences in methodology.
Facebook Metrics
We regularly evaluate our Facebook metrics to estimate the number of “duplicate” and “false” accounts among our MAUs. A duplicate account is one that a
user maintains in addition to his or her principal account. We divide “false” accounts 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) violating accounts, which represent user profiles that we believe are intended to be used for purposes that violate our terms of
service, such as bots and spam. The estimates of duplicate and false accounts are based on an internal review of a limited sample of accounts, and we apply
significant judgment in making this determination. For example, to identify duplicate accounts we use data signals such as identical IP addresses and similar user
names, and to identify false accounts we look for names that appear to be fake or other behavior that appears inauthentic to the reviewers. Any loss of access to
data signals we use in this process, whether as a result of our own product decisions, actions by third-party browser or mobile platforms, regulatory or legislative
requirements, or other factors, also may impact the stability or accuracy of our estimates of duplicate and false accounts. Our estimates also may change as our
methodologies evolve, including through the application of new data signals or technologies or product changes that may allow us to identify previously
undetected duplicate or false accounts and may improve our ability to evaluate a broader population of our users. Duplicate and false accounts are very difficult to
measure at our scale, and it is possible that the actual number of duplicate and false accounts may vary significantly from our estimates.
In the fourth quarter of 2019, we estimated that duplicate accounts may have represented approximately 11% of our worldwide MAUs. We believe the
percentage of duplicate accounts is meaningfully higher in developing markets such as the Philippines and Vietnam, as compared to more developed markets. In
the fourth quarter of 2019, we estimated that false accounts may have represented approximately 5% of our worldwide MAUs. Our estimation of false accounts can
vary as a result of episodic spikes in the creation of such accounts, which we have seen originate more frequently in specific countries such as Indonesia and
Vietnam. From time to time, we disable certain user accounts, make product changes, or take other actions to reduce the number of duplicate or false accounts
among our users, which may also reduce our DAU and MAU estimates in a particular period. We intend to disclose our estimates of the number of duplicate and
false accounts among our MAUs on an annual basis.
4
Table of Contents
The numbers of DAUs and MAUs discussed in this Annual Report on Form 10-K, as well as ARPU, do not include users on Instagram, WhatsApp, or our
other products, unless they would otherwise qualify as DAUs or MAUs, respectively, based on their other activities on Facebook.
Family Metrics
Many people in our community have user accounts on more than one of our products, and some people have multiple user accounts within an individual
product. Accordingly, for our Family metrics, we do not seek to count the total number of user accounts across our products because we believe that would not
reflect the actual size of our community. Rather, our Family metrics represent our estimates of the number of unique people using at least one of Facebook,
Instagram, Messenger, and WhatsApp. We do not require people to use a common identifier or link their accounts to use multiple products in our Family, and
therefore must seek to attribute multiple user accounts within and across products to individual people. To calculate these metrics, we rely upon complex
techniques, algorithms and machine learning models that seek to count the individual people behind user accounts, including by matching multiple user accounts
within an individual product and across multiple products when we believe they are attributable to a single person, and counting such group of accounts as one
person. These techniques and models require significant judgment, are subject to data and other limitations discussed below, and inherently are subject to statistical
variances and uncertainties. We estimate the potential error in our Family metrics primarily based on user survey data, which itself is subject to error as well. While
we expect the error margin for our Family metrics to vary from period to period, we estimate that such margin generally will be approximately 3% of our
worldwide MAP. At our scale, it is very difficult to attribute multiple user accounts within and across products to individual people, and it is possible that the
actual numbers of unique people using our products may vary significantly from our estimates, potentially beyond our estimated error margins. As a result, it is
also possible that our Family metrics may indicate changes or trends in user numbers that do not match actual changes or trends.
To calculate our estimates of Family DAP and MAP, we currently use a series of machine learning models that are developed based on internal reviews of
limited samples of user accounts and calibrated against user survey data. We apply significant judgment in designing these models and calculating these estimates.
For example, to match user accounts within individual products and across multiple products, we use data signals such as similar device information, IP addresses,
and user names. We also calibrate our models against data from periodic user surveys of varying sizes and frequency across our products, which are inherently
subject to error. In addition, our data limitations may affect our understanding of certain details of our business and increase the risk of error for our Family metrics
estimates. Our techniques and models rely on a variety of data signals from different products, and we rely on more limited data signals for some products
compared to others. For example, as a result of limited visibility into encrypted products, we have fewer data signals from WhatsApp user accounts and primarily
rely on phone numbers and device information to match WhatsApp user accounts with accounts on our other products. Similarly, although Messenger Kids users
are included in our Family metrics, we do not seek to match their accounts with accounts on our other applications for purposes of calculating DAP and MAP. Any
loss of access to data signals we use in our process for calculating Family metrics, whether as a result of our own product decisions, actions by third-party browser
or mobile platforms, regulatory or legislative requirements, or other factors, also may impact the stability or accuracy of our reported Family metrics. Our estimates
of Family metrics also may change as our methodologies evolve, including through the application of new data signals or technologies, product changes, or other
improvements in our user surveys, algorithms, or machine learning that may improve our ability to match accounts within and across our products or otherwise
evaluate the broad population of our users. In addition, such evolution may allow us to identify previously undetected violating accounts (as defined below).
We regularly evaluate our Family metrics to estimate the percentage of our MAP consisting solely of “violating” accounts. We define “violating” accounts
as accounts which we believe are intended to be used for purposes that violate our terms of service, including bots and spam. In the fourth quarter of 2019, we
estimated that approximately 3% of our worldwide MAP consisted solely of violating accounts. Such estimation is based on an internal review of a limited sample
of accounts, and we apply significant judgment in making this determination. For example, we look for account information and behaviors associated with
Facebook and Instagram accounts that appear to be inauthentic to the reviewers, but we have limited visibility into WhatsApp user activity due to encryption. In
addition, if we believe an individual person has one or more violating accounts, we do not include such person in our violating accounts estimation as long as we
believe they have one account that does not constitute a violating account. From time to time, we disable certain user accounts, make product changes, or take other
actions to reduce the number of violating accounts among our users, which may also reduce our DAP and MAP estimates in a particular period. We intend to
disclose our estimates of the percentage of our MAP consisting solely of violating accounts on an annual basis. Violating accounts are very difficult to measure at
our scale, and it is possible that the actual number of violating accounts may vary significantly from our estimates.
5
Table of Contents
The numbers of Family DAP and MAP discussed in this Annual Report on Form 10-K, as well as ARPP, do not include users on our other products, unless
they would otherwise qualify as DAP or MAP, respectively, based on their other activities on our Family products.
User Geography
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 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 our metrics are also susceptible to algorithm or other
technical errors, and our estimates for revenue by user location and revenue by user device are also affected by these factors.
6
Table of Contents
PART I
Item 1.
Business
Overview
Our mission is to give people the power to build community and bring the world closer together.
We build useful and engaging products that enable people to connect and share with friends and family through mobile devices, personal computers, virtual
reality headsets, and in-home devices. 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 family members and friends to the public at large, and stay
connected everywhere by accessing our products, including:
•
Facebook. Facebook enables people to connect, share, discover, and communicate with each other on mobile devices and personal computers. There
are a number of different ways to engage with people on Facebook, including News Feed, Stories, Marketplace, and Watch.
•
Instagram. Instagram brings people closer to the people and things they love. It is a place where people can express themselves through photos,
videos, and private messaging, including through Instagram Feed and Stories, and explore their interests in businesses, creators and niche
communities.
•
Messenger. Messenger is a simple yet powerful messaging application for people to connect with friends, family, groups, and businesses across
platforms and devices.
•
WhatsApp. WhatsApp is a simple, reliable, and secure messaging application that is used by people and businesses around the world to communicate
in a private way.
•
Oculus. Our hardware, software, and developer ecosystem allows people around the world to come together and connect with each other through our
Oculus virtual reality products.
We generate substantially all of our revenue from selling advertising placements to marketers. Our ads enable marketers to 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,
Messenger, and third-party applications and websites.
We are also investing heavily in other consumer hardware products and a number of longer-term initiatives, such as augmented reality, artificial intelligence
(AI), and connectivity efforts, to develop technologies that we believe will help us better serve our mission over the long run.
Competition
Our business is characterized by innovation, rapid change, and disruptive technologies. We compete with companies that sell advertising, as well as with
companies that provide social, media, and communication products and services that are designed to engage users on mobile devices and online. We face
significant competition in every aspect of our business, including from companies that facilitate communication and the sharing of content and information,
companies that enable marketers to display advertising, companies that distribute video and other forms of media content, and companies that provide development
platforms for applications 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 also compete with the following:
•
Companies that offer products across broad platforms that replicate capabilities we provide. For example, among other areas, we compete with Apple
in messaging, Google and YouTube in advertising and video, Tencent and Snap in messaging and social media, Bytedance and Twitter in social
media, and Amazon in advertising.
•
Companies that provide regional social networks and messaging products, many of which have strong positions in
7
Table of Contents
particular countries.
•
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.
•
Companies that develop and deliver consumer hardware and virtual reality products and services.
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.
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, as engagement with products
like video increases, and as we deepen our investment in new technologies like AI, 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
protecting the security, privacy, and integrity of our platform by investing in both people and technology to strengthen our systems against abuse.
Sales and Operations
The majority of our marketers use our self-service ad platform to launch and manage their advertising campaigns. We also have a global sales force that is
focused on attracting and retaining advertisers and providing support to them throughout the stages of the marketing cycle from pre-purchase decision-making to
real-time optimizations to post-campaign analytics. We work directly with these advertisers, as well as through advertising agencies and resellers. We operate more
than 70 offices around the globe, the majority of which have a sales presence. We also invest in and rely on self-service tools to provide direct customer support to
our users and partners.
Marketing
Historically, our communities have generally 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 grow our brand and help build
community around the world.
Intellectual Property
To establish and protect our proprietary rights, we rely on a combination of patents, 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 variety of laws and regulations in the United States and abroad that involve matters central to our business. 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 privacy, data protection
and personal information, rights of publicity, content, intellectual property, advertising, marketing, distribution, data security, data retention and deletion, electronic
contracts and other communications, competition, protection of minors, consumer protection, telecommunications, product liability, taxation, economic or other
trade prohibitions or sanctions, anti-corruption law compliance, 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, content, competition, and other laws and regulations can
impose different obligations or 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. As a result, the application,
interpretation, and enforcement of these laws and regulations are often uncertain, particularly in the
8
Table of Contents
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.
Proposed or new legislation and regulations could also significantly affect our business. For example, the European General Data Protection Regulation
(GDPR) took effect in May 2018 and applies to all of our products and services used by people in Europe. The GDPR includes operational requirements for
companies that receive or process personal data of residents of the European Union that are different from those previously in place in the European Union, and
includes significant penalties for non-compliance. The Brazilian General Data Protection Law will impose requirements similar to GDPR on products and services
offered to users in Brazil, effective in August 2020. The California Consumer Privacy Act, which took effect in January 2020, also establishes certain transparency
rules and creates new data privacy rights for users. Similarly, there are a number of legislative proposals in the European Union, the United States, at both the
federal and state level, as well as other jurisdictions that could impose new obligations or limitations in areas affecting our business, such as liability for copyright
infringement. 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.
We are, and expect to continue to be, the subject of investigations, inquiries, data requests, requests for information, actions, and audits by government
authorities and regulators in the United States, Europe, and around the world, particularly in the areas of privacy, data protection, law enforcement, consumer
protection, and competition, as we continue to grow and expand our operations. We are currently, and may in the future be, subject to regulatory orders or consent
decrees, including the modified consent order we entered into in July 2019 with the U.S. Federal Trade Commission (FTC) which is pending federal court approval
and which, among other matters, will require us to implement a comprehensive expansion of our privacy program. 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 remedies), interrupt or require us to change our business practices in a manner materially adverse to our business, divert
resources and the attention of management from our business, or subject us to other remedies that adversely affect our business.
Employees
As of December 31, 2019, we had 44,942 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.
Available Information
Our website address is www.facebook.com. Our Annual Reports 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 Exchang