By examining Facebook’s quarterly and yearly financial filings, we can assess its quarterly and yearly capital expenditure (capex), and its quarterly property and equipment spending breakdown, and begin to understand its capital depreciation rate. The partially complete data provide a window into how Facebook invests in physical assets in order to maintain its more than 1 billion users and its growing platform, and how those costs might increase over time.
Facebook’s 8-K and 10-Q filings show yearly capital investment since 2007. Capital investment is split between purchased property and equipment, and property and equipment required under capital lease. Facebook occasionally purchases property and equipment for which it obtains capital financing under sale-leaseback transactions. These leases are typically for three years, except for 15 year building leases, and other long term agreements.1
Since 2010 Facebook has seen a rapid increase in leased and purchased capital. Purchased capital grew 788%, while leased capital grew 288% between 2009 and 2010. Capital purchases and leases between 2010 and 2011 grew at similar rates. Facebook’s leased capital and equipment growth rate only declined slightly in 2012; however, purchased property and equipment continued to grow by 103% over year ago capital purchase rate.
We can also look at Facebook’s quarterly capital investment spending for the past two fiscal years. The data are insufficient to determine any trends in capital purchases and leases; however, the limited data suggest that Facebook engaged in an unusually high amount of capital purchases relative to property acquired under capital leases during the first two quarters of 2012. These costs could be related to Facebook’s new datacenter in Lulea, Sweden.
Facebook’s capital investment shows only its quarterly purchases or leases of new property and equipment. It is therefore indicative of the rate of growth in terms of expenditure on new capital (i.e. property and equipment purchases during the quarter); however, it fails to account for the costs of maintaining acquired capital (i.e. the depreciation costs), and accounting mechanisms that affect the quarterly recognized cost of capital.
In order to get a better sense of Facebook’s cost of capital, we can look at its cost of capital expenditure (capex) on a quarterly basis. We can derive a sense of the capex costs by looking at Facebook’s annual 10-Q filing, which provides capex spending by segment: construction in progress; computer software, equipment, and other; leasehold improvements; buildings; land; and network equipment.
On a quarterly basis, Facebook’s costs have increased from $1.92 billion in Q4 2011 to $3.3 billion in Q4 2012. Although we are missing Q1 2012 data, we can imagine the capex ramp that would sit between Q4 2011 and Q2 2012. We can see that the largest component of Facebook’s capex is network equipment, which encompasses the cost of maintaining the company’s datacenters. Network equipment cost the company $1.9 billion in the fourth quarter.2
Facebook also gave some indication to its capital depreciation rate. For its network equipment, Facebook estimated that the useful life of its purchases and leases would be three to four years. Buildings will fully depreciate after 15 to 20 years. Computer software and office equipment will last two to five years. Facebook also states that leased equipment and leasehold improvements depreciate at a rate lesser to the useful life or remain lease term.
Facebook’s capital expenditure will continue to grow in order to support its large user base. We can expect Facebook to continue to purchase or lease new equipment; however, the rate may decrease. CFO David Ebersman anticipated spending $1.8 billion on capital investment in FY 2013. Concurrently, Facebook’s costs will continue to grow with maintenance costs, and as its acquired and leased capital begins to depreciate along the timelines outlined above.
Notes
- Form 10-Q, Facebook Inc., 2012., Form 8-K (various), Facebook Inc., 2012.
- Because Facebook is a newly public company, Q1 2012 capex data is not yet available. Capex for Q1 2012 will be provided in the next 10-Q filing, along with fiscal year 2013 capex data.
