Facebook Files 10-Q With SEC, Details Mobile Users, Zynga, Lawsuits, Other Issues

Following its second-quarter earnings call last Thursday, Facebook filed its 10-Q quarterly document with the Securities and Exchange Commission Tuesday, addressing, among other topics, increased mobile usage, revenue from game developer Zynga, and the status of various lawsuits.

Following its second-quarter earnings call last Thursday, Facebook filed its 10-Q quarterly document with the Securities and Exchange Commission Tuesday, addressing, among other topics, increased mobile usage, revenue from game developer Zynga, and the status of various lawsuits.

Following are some of the highlights from the 10-Q:

Mobile Usage

Worldwide mobile monthly average users increased by 67 percent from 325 million as of June 30, 2011, to 543 million as of June 30, 2012. In all regions, an increasing number of our MAUs are accessing Facebook through mobile devices, with users in the U.S., India, and Brazil representing key sources of mobile growth over this period. Approximately 102 million mobile MAUs accessed Facebook solely through mobile apps or our mobile website during the month ended June 30, 2012, increasing 23 percent from 83 million during the month ended March 31, 2012. The remaining 441 million mobile MAUs accessed Facebook from both personal computers and mobile devices during that month.

Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results.

We had 543 million MAUs who used Facebook mobile products in June 2012. While most of our mobile users also access Facebook through personal computers, we anticipate that the rate of growth in mobile usage will exceed the growth in usage through personal computers for the foreseeable future and that the usage through personal computers may continue to decline in certain markets, in part due to our focus on developing mobile products to encourage mobile usage of Facebook. For example, the number of daily active users using personal computers was essentially flat, and it declined modestly in certain key markets such as the U.S. and Europe during the second quarter of 2012 compared with the first quarter of 2012. We believe increased usage of Facebook on mobile devices has contributed to the recent trend of our DAUs increasing more rapidly than the increase in the number of ads delivered. We have historically not shown ads to users accessing Facebook through mobile applications or our mobile website. In March 2012, we began to include sponsored stories in users’ mobile news feeds. However, in the first half of 2012, we generated only a small portion of our revenue from the use of Facebook mobile products, and our ability to increase mobile revenues is unproven. If users increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetization strategies for our mobile users, or if we incur excessive expenses in this effort, our financial performance and ability to grow revenue would be negatively affected.

Facebook user growth and engagement 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 that mobile device users will continue to use Facebook rather than competing products. We are dependent on the interoperability of Facebook with popular mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade our products’ functionality or give preferential treatment to competitive products could adversely affect Facebook usage 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. We may not be successful in 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 on their mobile devices, or if our users choose not to access or use Facebook on their mobile devices or use mobile products that do not offer access to Facebook, our user growth and user engagement could be harmed.

Additionally, we are actively supporting platform developers’ efforts to develop their own mobile apps and websites that integrate with Facebook. Unlike apps that run within the Facebook website, which enable us to show ads and offer payments, we generally do not directly monetize from platform developers integrating their own mobile apps and websites with Facebook. Therefore, our platform developers’ efforts to prioritize Facebook integrations with their own mobile apps or websites may reduce or slow the growth of our user activity that generates advertising and payments opportunities, which could negatively affect our revenue. Although we believe that there are significant long-term benefits to Facebook resulting from increased engagement on Facebook-integrated websites and mobile apps, these benefits may not offset the possible loss of revenue, in which case our business could be harmed.

Zynga

Payments and other fees: We enable payments from our users to our platform developers. Our users can transact and make payments on the Facebook platform by using credit cards, PayPal, or other payment methods available on our website. We receive a fee from our platform developers when users make purchases from our platform developers using our payments infrastructure. We recognize revenue net of amounts remitted to our platform developers. We have mandated the use of our payments infrastructure for game apps on Facebook, and fees related to payments are generated almost exclusively from games. To date, games from Zynga have generated the majority of our payments and other fees revenue. In addition, we generate other fees revenue in connection with arrangements related to business development transactions and fees from various mobile providers; in recent periods, other fees revenue has been immaterial.

10 percent of our total revenue for both the second quarter and the first six months of 2012, and 12 percent of our total revenue for both the second quarter and the first six months of 2011, came from a single customer, Zynga. This revenue consisted of payments processing fees related to Zynga’s sale of virtual goods and from direct advertising purchased by Zynga. Additionally, Zynga’s apps generate pages on which we display ads from other advertisers; for the second quarter and the first six months of 2012, we estimate that an additional approximately 4 percent of our total revenue was generated from the display of these ads. In May 2010, we entered into an addendum to our standard terms and conditions with Zynga pursuant to which it agreed to use Facebook payments as the primary means of payment within Zynga games played on the Facebook platform. Under this addendum, we retain a fee of up to 30 percent of the face value of user purchases in Zynga’s games on the Facebook platform. This addendum expires in May 2015. Additionally, the addendum allows Facebook to display ads on Zynga.com, and in the second quarter of 2012, we began delivering ads on Zynga.com. The revenue associated with these ads was immaterial for the second quarter and the first six months of 2012.

In the first six months of 2012 and the full 2011 year, we estimate that up to 14 percent and 19 percent of our revenue, respectively, was derived from payments processing fees from Zynga, direct advertising from Zynga, revenue from third parties for ads shown on pages generated by Zynga apps, and Facebook ads and sponsored stories displayed on Zynga.com. If Zynga does not maintain its level of engagement with our users, or if we are unable to successfully maintain our relationship with Zynga, our financial results could be harmed.

Lawsuits

On March 12, 2012, Yahoo filed a lawsuit against us in the U.S. District Court for the Northern District of California, claiming that we infringe 10 of Yahoo’s patents that Yahoo claimed relate to “advertising,” “social networking,” “privacy,” “customization,” and “messaging,” and on April 27, 2012, Yahoo added two patents to the lawsuit that Yahoo claims relate to “advertising.” Yahoo sought unspecified damages, a damage multiplier for alleged willful infringement, and an injunction. On April 3, 2012, we filed our answer with respect to this complaint and asserted counterclaims that Yahoo’s products infringe 10 of our patents. On July 6, 2012, the parties entered into a settlement agreement resolving all claims made in the litigation. On July 9, 2012, the parties filed a stipulated dismissal of the litigation with the U.S. District Court for the Northern District of California, and this litigation was dismissed on July 10, 2012. We have no payment obligations under this settlement agreement.