Price $98.47 October 21, 2015 (from $120.00) Equity Analyst … · By 2017, we think the online...

USD Prev. 2013A Prev. 2014A Prev. 2015E Prev. 2016E

Rev. (MM) -- 7,872.0 -- 12,466.0 -- 17,001.0 22,904.0 24,196.0

EPS Non-GAAP

Mar -- 0.12 -- 0.36 -- 0.42A -- --

Jun -- 0.19 -- 0.43 -- 0.50A -- --

Sep -- 0.25 -- 0.43 -- 0.50 -- --

Dec -- 0.31 -- 0.54 -- 0.62 -- --

FY Dec -- 0.87 -- 1.77 -- 1.97 2.68 2.78

FY P/EPS Non-GAAP

113.2x 55.6x 50.0x 35.4x

Price Performance

OCT-14 FEB-15 JUN-15 OCT-15

100

90

80

70

Target Change

USA | Technology | Internet October 21, 2015

Facebook, Inc. (FB)Video Ads and Instagram - Facebook's NextBillion-Dollar Businesses

EQU

ITY R

ESEARC

H A

MERIC

AS

BUYPrice target $130.00

(from $120.00)Price $98.47

Financial SummaryNet Debt (MM): ($14,125.0)Cash/Share: $5.395 Yr. Rev. CAGR: 24.0%

Market Data52 Week Range: $99.24 - $72.00Total Entprs. Value (MM): $286,503.9Market Cap. (MM): $300,628.9Shares Out. (MM): 3,053.0Float (MM): 2,168.3Avg. Daily Vol.: 32,975,148

Jefferies US Internet Team *Jefferies Equity Research

[email protected] Pitz *

Equity Analyst(212) 336-7413 [email protected]

Brian Fitzgerald *Equity Analyst

(212) 284-2491 [email protected] O'Shea *

Equity Associate(212) 284-3415 [email protected]

Stan Velikov, CFA *Equity Associate

(415) 229-1534 [email protected] Werbelow *

Equity Associate(212) 284-2191 [email protected]

John Streppa, CFA *Equity Associate

(212) 738-5794 [email protected]

* Jefferies LLC

Key TakeawayWe are raising estimates and PT to $130 as we grow increasingly confidentaround key growth drivers especially Instagram, video ads, & the AudienceNetwork. For Instagram we model base case revs of $531MM in '16, growing to$1.4B in '17. See our detailed analysis starting page 25. We also believe theywill become a multi-billion dollar business for FB within the next two years asTV ad budgets shift online.

Video ads: the perfect storm. As video consumption explodes across FB's massive userbase, we think FB looks well positioned to capture an increasing portion of TV ad budgetsas marketers migrate toward data-driven, highly-targeted online video ad campaigns. By'17, we think the online video ad opportunity could be worth ~$17B / year in the US alone.We think Facebook and YouTube look best positioned to capture the bulk of that spend.As such, we believe video ads will become a multi-billion dollar business for FBwithin the next two years.

We are optimistic as Instagram opens up to all advertisers. With its beautiful visuallayout & massive (400MM MAUs), highly engaged audience, Instagram looks like a naturalad platform to us. Importantly, Instagram ads will leverage FB's anonymized user data,which nearly ensures these ads will deliver a similar bang-for-your-buck as core FB mobileads. Our base case 2016 Instagram rev estimate is $531MM, which we grow to$1.4B in 2017. See our analysis and detailed rev build starting p. 25.

We are raising estimates as we grow increasingly confident around key go-forwardgrowth drivers especially Instagram, video ads, and the Facebook Audience Network. Also,we note several other growth levers including WhatsApp, Messenger, Oculus, and a mixshift towards pricier ad formats over time (bottom funnel, video).

3Q checks suggest robust growth as expense levels remain the wild card.IgnitionOne noted FB continues to outpace the market in programmatic display during3Q. Also, AdRoll noted its retargeting clients increased their ad spend on FB by 31% Y/Y,suggesting uptake of FB's Dynamic Product Ads (DPAs) could be robust as we head towardthe holiday shopping season. For 3Q, we model $4.31B rev, $3.25B mobile rev, and $0.50NG EPS vs. $4.37B, $3.24B, and $0.52 consensus, respectively.

Valuation/RisksWe raise our PT from $120 to $130 on optimism around key go-forward growth drivers. OurPT is based on a 10-year DCF (4% LTGR; 10% WACC). FB trades at ~16x our '16 Adj. EBITDAestimate vs. our 35% 3-year EBITDA CAGR. Risks: User declines.

Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflictof interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 46 to 50 of this report.

Table of Contents The Perfect Storm: Online Video Ads Page 3

Video Consumption on Facebook is Soaring -- Page 4

Early Video Ad Trends Look Encouraging – Page 5

New Immersive Video Formats – Page 8

Sizing the Video Advertising Opportunity – Page 15 Omnicom Advises Advertisers to Shift 10-25% of TV Ad-Dollars to Online Video – Page 17 Discussions with Media Firms to Produce Professional Videos for FB – Page 17

TV + Online Video Convergence: A Deeper Dive Page 18 A Bit of Background on Gross Rating Point (GRP) Definition and Calculations – Page 19

Traditional GRP to iGRP Translation – 0 Practical Example – Online Video Advertising – Page 21 What are the Near-Term Impacts? – Page 23

Instagram: A Picture Perfect Ad Platform Page 25

Sizing Instagram’s Revenue Opportunity – Page 25 Visualizing an Instagram Ad – Page 31

Facebook Audience Network Page 35 Instant Articles Bring High Quality Content Direct to the Mobile Feed Page 36 3Q Checks and Recent KPI Trends Page 38 Raising Estimates Page 40 Facebook Model Page 41 Comp Sheet Page 44

FB

Target Change

October 21, 2015

page 2 of 50 , Jefferies Equity Research, [email protected] US Internet Team

Please see important disclosure information on pages 46 - 50 of this report.

The Perfect Storm: Online Video Ads

Video usage on Facebook is soaring as (portions of) TV ad budgets shift online As video consumption explodes across Facebook’s massive user base, we think the

company looks well positioned to capture an increasing portion of TV ad budgets as

marketers migrate towards data-driven, highly-targeted online video ad campaigns.

From an advertiser’s perspective, FB offers a compelling video ad product defined by:

Massive reach: A global audience of ~900MM+ people each day. A mobile

Super Bowl in the US every single day.

High engagement: FB users are already viewing 4B videos per day.

A clean, well-lit environment: A brand-safe advertising environment.

Best-in-class user data and ad-tech stack: Advertisers can leverage

Facebook’s data-set to run targeted ad campaigns.

By 2017, we think the online video advertising opportunity will be worth ~$17B per year

in the US alone. We think Facebook and Google (YouTube) look best positioned to

capture a meaningful portion of this spend.

The implication here is that video ads should become a multi-billion dollar business for

Facebook within the next two years, with significant upside if TV ad budgets shift online

faster than expected.

Note this new revenue stream won’t be 100% incremental given video ads will displace

other, lower priced ads (as FB keeps ad-loads mostly stable).

We believe video ads will become a

multi-billion dollar business for

Facebook within the next two years.

FB

Target Change

October 21, 2015



Video Consumption on Facebook is Soaring

Five years ago, most of the content shared on Facebook was text, plus some photos.

Today it is mostly photos with some text and video.

Over time we expect video will continue to become a (much) more dominant form of

media consumed on Facebook. The numbers bear this out.

Facebook exited 2014 with more than 3B video views per day, and in April 2015

management confirmed users were consuming over 4B video views per day.

Today, more than half of US daily users watch at least 1 video per day. Indeed, Facebook

management confirms the number of videos posted per person increased +75% Y/Y

globally and +94% Y/Y in the US. Growth is driven primarily by global events like the

World Cup plus an increase in user generated videos such as those associated with the

ALS ice bucket challenge.

For now, Facebook will not run ads against most of these videos as it prioritizes the user

experience over revenue. But the trends are clear. Facebook users are becoming

accustomed to viewing autoplay video in the News Feed, setting the stage for users

viewing more video ads going forward.

Over time we expect FB to continue to improve the video viewing experience. The

company is already testing a dedicated place to watch videos, which sounds a

lot like Facebook’s version of YouTube.

Facebook is also making it easier for advertisers to purchase video ads with a new Target

Rating Points (TRP) ad buying product. FB's TRP product will lean on Nielsen, which will

verify how well FB video ads perform in campaigns alongside traditional TV ads. The TRP

metric is a subset within a gross-rating point (GRP), the key metric for TV ad measurement

since the 50s.

Chart 1: Monthly Videos Viewed on FB (US, Desktop-Only)

Source: comScore

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FB

Target Change

October 21, 2015



Early Video Ad Trends Look Encouraging

While Facebook’s video ad business is in the early stages, early trends look encouraging.

1) Per comScore, on a 3 month rolling basis (Apr – June 2015 vs. 2014), the number of

video ads on Facebook increased +649% Y/Y.

Additionally, the number of video ads viewed per user continues to rise. Currently,

users in the US (desktop only) view ~1.6 ads. This is a low number and should rise

over time; another growth lever.

Chart 2: Video Ads on Facebook (US, Desktop-Only)

Source: comScore

0

500

1,000

1,500

2,000

FB

Target Change

October 21, 2015



Chart 3: Video Ad Loads on Facebook (US, Desktop-Only)

Source: comScore

2) According to a Facebook-commissioned Nielsen study, Facebook users are

impacted by video ads even before viewing them for a full second. According to the

study:

Results show that from the moment a video ad was viewed (even before one

second), lift happened across ad recall, brand awareness and purchase

consideration. This means that even people who never watched the video but did

see the impression were still impacted by the ad. And, as expected, lift increased the

longer people watch the ad.

Exhibit 1: Example Facebook Video Ad Unit

Source: Nielsen

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

FB

Target Change

October 21, 2015



Exhibit 2: Video Ad Performance Improves the Longer a User Watches the Ad

Source: Nielsen

3) Separately, online ad firm Nanigans compared the mobile vs. desktop performance

of Facebook’s Page Post Video Ads. The results underscored the effectiveness of video

ads, particularly on mobile.

The case study was based on multiple desktop and mobile video ad campaigns

(totaling ~$1.9MM in ad spend) for a leading video game developer. The developer

ran Page Post Video Ads in the Facebook mobile and desktop News Feeds to build

awareness and drive engagement ahead of their latest video game launches.

Key findings include:

Mobile Click Through Rates (CTR) were 2x higher than Desktop (8% vs. 4%)

Mobile CPCs were 65% lower than desktop CPCs. This is driven by the

much higher mobile CTR.

FB

Target Change

October 21, 2015



New Immersive Video Formats to Drive User Engagement and Time Spent

Facebook has been testing new, more immersive video experiences to help drive users to

interact with videos on Facebook. All of these products are meant to keep users engaged

while also offering a beautiful platform to display ads.

Facebook Live

Facebook Live Video allows public figures (Celebrities and other notable public figures) to

live stream directly to their fans. Adoption has already picked up with stars such as

Dwyane “The Rock” Johnson, Vin Diesel and Serena Williams. The platform also allows

users to interact with the broadcaster through a comment section in the video.

Exhibit 3: Facebook Live Moments

Source: Facebook

FB

Target Change

October 21, 2015



The NBA used Facebook Live to simulcast “NBA Real Training Camp” earlier in the year.

The first of its kind event highlighted the ability of brands to bring their content directly to

the consumers. The show had pre-season practice content and interviews with players,

coaches, and other team personnel. The stream happened at noon ET which the NBA said

was “perfect for this type of initiative. A large portion of your audience is going to be at

their computer or on their mobile phone or tablet.”

Exhibit 4: "NBA Real Training Camp"

Source: Facebook

FB

Target Change

October 21, 2015



360 Videos

Facebook has also revealed 360 Videos that allow the user to view a video from all angles

in their News Feed. Star Wars, Discovery, GoPro, and Lebron James have all published

360 videos. Similar to the YouTube product, the 360 videos allow an immersive

experience where users can explore their surroundings in a video by moving their device

around. Facebook envisions this as a product where friends can join their friends on a

vacation or discover new content from their favorite publishers. Vice News has even used

this feature to broadcast the news so users can have a real sense of what is happening.

The Facebook team worked closely with the Oculus team to develop this technology

which could hint at bringing more 360 degree content to the Oculus Rift (owned by

Facebook).

Exhibit 5: Facebook 360 Videos

Source: Facebook

FB

Target Change

October 21, 2015



Suggested Videos

Facebook is also testing new video delivery services such as Suggested Videos. Currently

being tested on iPhones, Suggested Videos allows users the ability to discover multiple

related videos after a video has been watched from the News Feed. Suggested Videos has

rolled out to iPhones globally and Facebook is starting to test ads within the experience.

This feature will help increase the amount of time that Facebook users are viewing videos.

Exhibit 6: Suggested Videos

Source: Facebook

FB

Target Change

October 21, 2015



Floating Video Displays – Videos for the Multi-tasker

Facebook has also been testing ways to allow the user to continue to consume his/her

favorite video content while also being able to continue to scroll through his/her news

feed. Floating videos will let users start watching a video and then place it in the top

corner of the screen to allow access to the rest of their News Feed.

Exhibit 7: Floating Videos

Source: Facebook

FB

Target Change

October 21, 2015



Videos- A Dedicated Page for Videos

Lastly, Facebook has also tested a dedicated page on Facebook exclusively for video

content. Videos from friends, pages a user follows, or videos a user has saved for later,

and other video publishers will be available for users on the page. This tool will be a

destination for users to discover, share, and like new video content and will serve as

another platform for Facebook to serve video ads on.

Exhibit 8: Dedicated Videos Page

Source: Facebook

FB

Target Change

October 21, 2015



New Tools For Publishers As Well

With these new video platforms, Facebook is also working on developing the tools for

publishers to understand how their content is being consumed. Page owners will now be

able to analyze the number of views and 30-second views across the entire page

(previously this was limited to a per video basis). Page owners will also be able to see

breakdowns of organic vs. paid, auto-played vs. clicked-to-play, and unique vs. repeat

views to gain insights into the Page’s audience. Publishers will also be able to examine

their top videos over a specific time period as well as have access to information such as

views, reach, and other helpful video metrics.

Exhibit 9: Facebook Video Insights

Source: Facebook

Exhibit 10: Top Video Insights

Source: Facebook

FB

Target Change

October 21, 2015



Sizing the Video Advertising Opportunity

The Online Advertising Industry is one of the fastest growing subsections of the

advertising ecosystem. According to our estimates, online video advertising spend is

expected to reach $10B+ in spend by 2015 (surpassing $17B by 2017) in the U.S

alone, or a 3 year CAGR of 35% (’13-’17) vs. 16% (’13-’17) for overall online

advertising spend.

Chart 4: US Online Video as a Percentage of the Overall Online Ad Spend ($B)

Source: Jefferies, Magna, IAB

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

2010 2011 2012 2013 2014 2015 2016 2017

Total Online Advertising Spend Online Video

By 2017, we believe online video ads

will be a $17B / year opportunity in

the US alone.

FB

Target Change

October 21, 2015



Table 1: Jefferies US Online Advertising Model (includes mobile)

Source: Jefferies, IAB, eMarketer

Table 2: Facebook Video Advertising Revenue Estimates ($MM)

FB US Video Advertising 0 150 910 1,853 2,600

% YoY Growth - - 507% 104% 40%

FB Int’l Video Advertising 50 490 998 1,400

% YoY Growth - - 880% 104% 40%

TOTAL FB Video Advertising - 200 1,400 2,850 4,000

% YoY Growth - - 600% 104% 40%

Source: IAB, MagnaGlobal, Company Reports, Jefferies Estimates

2012A 2013A 2014A 2015E 2016E 2017E 13-17 CAGR

Search 18,039 20,726 23,201 26,541 30,252 34,160

growth Y/Y 15.9% 14.9% 11.9% 14.4% 14.0% 12.9% 13.3%

% of Total Spend 49.3% 48.4% 46.8% 46.1% 45.9% 45.8%

Banner + Rich Media + Sponsorship 10,802 12,398 13,650 15,343 16,971 18,385

growth Y/Y 16.8% 14.8% 10.1% 12.4% 10.6% 8.3% 10.4%

% of Total Spend 29.5% 29.0% 27.5% 26.7% 25.8% 24.7%

Banner 8,844 10,304 11,469 13,127 14,697 16,110

growth Y/Y 29.9% 16.5% 11.3% 14.5% 12.0% 9.6% 11.8%

% of Total Spend 24.2% 24.1% 23.1% 22.8% 22.3% 21.6%

Rich Media 1,113 1,328 1,438 1,497 1,582 1,604

growth Y/Y -15.4% 19.3% 8.3% 4.1% 5.7% 1.4% 4.8%

% of Total Spend 3.0% 3.1% 2.9% 2.6% 2.4% 2.2%

Sponsorship 845 766 744 720 692 671

growth Y/Y -24.6% -9.3% -2.9% -3.2% -3.8% -3.0% -3.2%

% of Total Spend 2.3% 1.8% 1.5% 1.3% 1.1% 0.9%

Video 3,453 5,145 7,295 9,903 13,050 16,856

growth Y/Y 32.5% 49.0% 41.8% 35.7% 31.8% 29.2% 34.5%

% of Total Spend 9.4% 12.0% 14.7% 17.2% 19.8% 22.6%

Classified (& auctions) 2,430 2,597 2,925 3,109 3,164 3,356

growth Y/Y -5.8% 6.9% 12.6% 6.3% 1.8% 6.1% 6.6%

% of Total Spend 6.6% 6.1% 5.9% 5.4% 4.8% 4.5%

Referrals/Lead Generation 1,689 1,749 2,355 2,533 2,373 1,753

growth Y/Y 11.0% 3.6% 34.6% 7.6% -6.3% -26.1% 0.1%

% of Total Spend 4.6% 4.1% 4.8% 4.4% 3.6% 2.4%

Email 156 165 149 144 99 75

growth Y/Y -26.8% 5.8% -9.9% -3.2% -31.3% -24.6% -18.0%

% of Total Spend 0.4% 0.4% 0.3% 0.3% 0.2% 0.1%

FB

Target Change

October 21, 2015



Omnicom CEO Advises Marketers to Shift 10-25% of TV Ad-Dollars to Online

Video

In late 2014, the CEO of ad-giant Omnicom’s media operations Daryl Simm advised

marketers to move 10% to 25% of TV ad dollars to online video. Omnicom oversees

~$54B of annual ad spend, including major brand campaigns from the likes of PepsiCo,

Visa, McDonald’s and Apple.

We believe this is yet more evidence we are approaching an inflection point where

meaningful chunks of TV ad budgets will begin to shift online, with Facebook being an

obvious beneficiary.

The offline-to-online shift will be driven by a surge in marketers’ desire for more

measurement around video ad campaigns. Measurement and accountability are the

hallmarks of online advertising, where advertisers can more easily calculate the ‘bang for

their advertising buck’.

Simm also said the amount of [high] quality online video is still an issue. In order for more

money to shift to online video, there is a need for even more premium and relevant

content. This brings us to our next point.

Facebook is Reportedly in Discussions With Several Media Firms to Produce

More Professional Short-Form Videos for the Social Network

According to a March 24 article in The Information, Facebook is in discussions with media

firms like Vice, The Onion and Vox Media to produce short-form video that will be

injected directly into users’ News Feeds.

The videos are expected to be rolled out later this year, and Facebook and its content

partners will be looking for advertisers to sponsor the videos in the coming weeks.

FB

Target Change

October 21, 2015



TV + Online Video Advertising Convergence – A Deeper Look at What is Driving the Trend

TV advertisers have been relatively slow to shift their ad spend dollars to online media due

to the inability to easily compare the effectiveness of campaigns across various

engagement points (online vs. TV). Traditionally, marketers use the concept of Gross

Rating Point (GRP) to measure the frequency and reach of their campaigns across

demographics. GRP is thus essentially a measure – an independent “exchange rate” – for

the buying/valuing of advertising. This “common currency” allows for the valuation,

comparison, acquisition and substitution (of inventory/impressions) across media types

and channels.

Various on-line ad providers have offered their own metrics arguing that they can offer

incredible granularity on their audience, but advertisers seemingly refuse to believe these

metrics unless they can be independently verified. YouTube has heard this message over

and over and in 2014 announced that they would be partnering with Nielsen to offer

Nielsen’s Online Campaign Ratings (OCR) on Google’s Preferred Videos. The goal is to

give marketers more actionable, open and transparent measurement of their

campaigns to demonstrate the effectiveness of an online video campaign.

Google will be using this along with Comscore’s validated Campaign Essentials (vCE) to

negotiate upfront deals with advertisers and agencies to market their wears on Google

Preferred channels.

Google bringing GRP-like measures to a digital, actionable item will be a powerful tool for

advertisers and publishers as they will be able to see the results of their campaign in real

time. This is a step toward better third party validation. And if an advertiser is not hitting

their intended audience, they can pivot the campaign in real-time rather than waiting

weeks for a report (for example, from a more traditional media platform). Additionally,

using a common language that the advertisers are accustomed to seeing should increase

the rate of adoption. This highlights Google’s strategy of promoting the top 5% of their

contributors in selected verticals and packaging them similar to how advertising is sold

(upfront with guaranteed audience/viewing) on television (Google’s Preferred initiative).

Chart 5: Evolution of Media Metrics in a Programmatic Landscape

Source: Simulmedia, MyersBizNet Media and Marketing Investment Data and Forecasts

Eventually the industry needs to

move beyond age/sex demos.

“Adults 18-49” is not a demo, it’s

a family reunion. A heavy

purchaser PRP guarantee, for

example, is far more targeted and

less ‘spray and pray.”

~Dave Morgan, CEO Simulmedia

FB

Target Change

October 21, 2015



Reaching specific audiences remains key for advertisers— and that means hitting the right

consumers, not just the most / largest audience. So there is a need for campaign-specific

ratings (“currencies”) standardized across platforms. Accordingly, OCR integration offers

metrics comparable to TV ratings – so all parties have the ability to observe an audience in

real-time and compare data across devices and platforms. As Dave Morgan from

Simulmedia points out -- the need for impact-based (vs reach-based) advertising

mechanisms will increasingly play a part in leading the convergence of TV and online.

A Bit of Background -- Gross Rating Point (GRP) Definition and Calculation

While GRP began as a manual process of multiplying the number of insertions with each

rating point and then summing them together to form GRP, a simpler formula has since

been developed -- GRP is an advertising measurement term used to express the size of an

audience reached by a specific media or schedule. Specifically, GRPs quantify impressions

as a percentage of the population reached (versus absolute numbers reached). Target

Rating Points (TRP) are also used in similar fashion, but focus on a more narrowly defined

target audience.

GRP is the sum of ratings achieved by a specific media vehicle or schedule. It measures the

total volume of delivery of an advertiser’s message to the target audience. The formula is:

GRP= Reach x Frequency x 100

where

Reach = Unique Target audience segment/Target Universe size -- The numerator

is the target audience reached (actual unduplicated impressions delivered); the

denominator is the universe size based on the total US population for that

specific target (i.e., the number of TV households tuned into a program / total

number of TV households)

Frequency = the number of times that the average household or person is

exposed to the advertising schedule (i.e., how many times the audience has the

opportunity to see a commercial)

The chart below illustrates GRP calculation, reach and frequency. Each home shows

which days the TV set was turned on during the time which a specific show was playing.

Each home represents 10% of the universe of 10 homes, therefore, each represents a 10

rating every time the show plays.

Chart 6: Sample GRP, Reach and Frequency Calculation

Source: Jefferies

M, ThM, T, W

T, W, FTh, FT W, Th

W, F

FB

Target Change

October 21, 2015



So the total GRP for this selected campaign can be calculated as follows:

Monday = 20 Rating

Tuesday = 30 Rating

Wednesday = 40 Rating

Thursday = 30 Rating

Friday = 30 Rating

Total GRP: 150

Reach: 70 (Viewing households/ Total TV households = 7/10 * 100 = 70)

Frequency: 2.14 (GRP/Reach = 150/70 = 2.143)

Alternatively, GRPs may be calculated as a specific number of impressions delivered to a

target universe as outlined in this formula:

GRP= (Target Impressions / Target Universe Size) x 100

For example, a sample GRP calculation using this Target Impressions formula:

Male 18-24 Impressions

US Population Male 18-24

GRP

23,512,500 15,675,000 = (23,512,500 / 15,675,000) x 100 = 150

Nielsen National People Meter further extended the rating originally based on HH to

individual, further allowing rating points to be assigned to different demographic

populations.

The widespread adoption of GRP allowed it to become the common currency for media

planning and reporting for TV commercials.

Traditional GRP to iGRP Translation

While still early days, Comscore’s vCE and Nielsen’s OCR provide data that may help

advertisers bridge the gap between offline and online media campaign weighted reach

metrics to compare the advertising strength of various media vehicles.

Comscore’s Campaign Essentials utilizes one million UVs (with 250,000 contributing to

demographic projections monthly). Validated CE (vCE) expanded upon CE in 2012,

incorporating impressions served to PCs, in-geo (country) and viewability and outlier

activities into score reporting. Though vCE is not universally applicable (especially for

pre-roll video due to iFrame limitations), it is widely accepted as a trusted third-party

reporting for impressions in target, UVs in target and average frequency – all necessary

components for computing iGRPs.

Nielsen holds the industry standard in TV rating and can be seen as the founder of TV

GRP. Online Campaign Ratings (OCR) were launched in 2011, originally leveraging

Facebook registrations calculated with the Nielsen multiplatform home panel for demo

reporting. Placement and geo reporting were added in 2012, and Nielsen currently

utilizes its access to more than 150 million privacy-protected registered users, directly

assigning actual demographics to 30-50% of campaign impressions. Nielsen’s strong tie

to traditional media planning has made OCR a highly demanded tool.

FB

Target Change

October 21, 2015



Chart 7: Nielsen OCR and comScore vCE Comparison

Source: BrightRoll, Nielsen, comScore

Online video advertisements are often compared to TV commercials, creating this

growing demand for the GRP metric to be applied to the new media form. Thus, iGRP

was adapted as:

Chart 8: iGRP Formula

Source: BrightRoll

Practical Example – Online Video Advertising

Let’s look at a practical example of delivering a 150 GRP campaign to US adults aged 18-

49. Holding the frequency constant, we see that based on Nielsen estimates the

campaign reach would be 92.3M Adults aged 18-49, and based on Comscore estimates

the reach would be 95.5M Adults aged 19-49. Total impressions for the Nielsen

campaign equal 197.8M (92.3M*2.143), while total impressions for the Comscore

campaign equal 204.7M (95.5M*2.143).

Chart 9: Calculating iGRP using Individuals

Source: Jefferies

Nielsen's Online Campaigns Ratings (OCR) comScore's validated Campaign Essentials (vCE)

MRC Accreditation Yes Yes

Demographic ProjectionsHas access to more than 150 million privacy-

protected registered users

1 Million UVs, 250K contributing to demographics on a

monthly basis

Impression Reporting "IMPRESSIONS" Verification and Viewability measures in place Only those that had the opportunity to be seen

Total US Population Estimates "UNIVERSE" 298,315,476 303,318,091

Cross-Platform MeasurementCross-Platform Campaign Ratings - TV, online and

tablets

validated Campaign Essentlials Multi-Platform - TV,

online, mobile, tablet

Campaign Reach Nielsen Population

A 18-49

Nielsen Total US Population Frequency A 18-49 GRP

92,286,261 131,846,305 298,315,476 2.143 150

Campaign Reach Comscore Population

A 18-49

Comscore Total US Population Frequency A 18-49 GRP

95,536,452 136,489,745 303,318,091 2.143 150

FB

Target Change

October 21, 2015



The example above assumes that 100% of the impressions delivered actually reached the

target audience of US adults aged 18-49. This is broken down in the chart below:

Chart 10: Total Impressions Delivered at 100% Target Rate

Source: Jefferies

From a practical standpoint, you cannot get 100% (perfect) targeting – as a base case,

you could hit the corresponding composition %’s organically – using no targeting as

such:

Chart 11: Total Impressions Delivered at Organic Composition Rate

Source: BrightRoll, Jefferies

In reality, online campaigns that use audience targeting and optimization deliver greater

yield / efficiency because they drive a higher number of impressions in the targeted

audience -- 73-78% (below) vs. the 44-45% organic rates (above) for Nielsen and

comScore, respectively.

Chart 12: Total Impressions Delivered Utilizing Online Targeting

Source: BrightRoll, Jefferies

Total Impressions

to Deliver

Nielsen Population

A 18-49

Nielsen Total US Population % Delivered to

Target Audience

A 18-49 GRP

197,769,458 131,846,305 298,315,476 100.00% 150

Total Impressions

to Deliver

Comscore Population

A 18-49

Comscore Total US Population % Delivered to

Target Audience

A 18-49 GRP

204,734,618 136,489,745 303,318,091 100.00% 150

Total Impressions

to Deliver

Nielsen Population

A 18-49


Target Audience

A 18-49 GRP

447,442,212 131,846,305 298,315,476 44.20% 150

Total Impressions

to Deliver

Comscore Population

A 18-49


Target Audience

A 18-49 GRP

454,965,817 136,489,745 303,318,091 45.00% 150

Total Impressions

to Deliver

Nielsen Population

A 18-49


Target Audience

A 18-49 GRP

273,162,234 131,846,305 298,315,476 72.40% 150

Total Impressions

to Deliver

Comscore Population

A 18-49


Target Audience

A 18-49 GRP

263,833,270 136,489,745 303,318,091 77.60% 150

FB

Target Change

October 21, 2015



What Are The Near-Term Impacts?

Media owners should continue to sell against classic GRP and cost-per-thousand (CPM)

metrics in the near term, but with better data & measurement tools shouldn’t we see the

adoption of more sophisticated, granular and immediate (maybe real-time) processes?

Media/video suppliers and aggregators would be able to commit to verifiable deliverables

across their total video reach -- cross-channel (and eventually cross media too – video,

display, search, mobile, TV, etc.). Enhanced measures of Return on Ad Spend (ROAS)

should follow, leading to truer performance-based advertising processes.

We continue to see evidence that brands are allocating a larger portion of their budgets

toward digital media. For example, Acura is launching its new TLX luxury sedan in the US

with a robust campaign that will allocate 30% of its budget toward digital. Importantly,

this campaign will not run a single ad on broadcast TV during prime-time. Of course, TV is

still a meaningful part of Acura’s marketing plan, accounting for more than half the

campaign’s budget. But Acura’s definition of TV is evolving to now include long-form,

high-quality content that will run on digital platforms (where the company’s ads will

complement the more traditional TV buys on cable channels like ESPN).

Exhibit 11: Acura Sponsored Web Series “Comedians in Cars Getting Coffee”

Source: YouTube

FB

Target Change

October 21, 2015



Within the context of measuring media advertising strength, we would also highlight that

video consumption habits continue to shift away from linear / live TV to “what you want”

/ “where you want” / “when you want”:

Time spent watching TV in America is at an all-time high, yet the majority of this time

continues to shift away from live programing. Viewers are increasingly watching TV on

their own schedule as opposed to the pre-determined air times of their favorite shows.

The chart below highlights a growing trend among premium cable shows; in 2006 nearly

70% of the audience for Dexter’s first season watched the show live, while the proportion

of live viewing for Homeland is now almost the mirror opposite. Showtime’s executive VP

of program planning, Kim Lemon, went so far to say that for some of Showtime’s Sunday

shows the debut live rating can be “only 15% of what the ultimate weekly number will

be.”

Chart 13: Evolution Away from Live TV

Source: Nielsen, Rentrak, qz.com (http://qz.com/237600/charts-how-we-watch-tv-now/)

FB

Target Change

October 21, 2015



http://qz.com/237600/charts-how-we-watch-tv-now/)

Instagram: A Picture Perfect Ad Platform With its beautiful visual layout (photos and video) and a massive (400MM MAUs, larger

than Twitter), highly engaged audience, Instagram looks like a natural ad platform to us.

To date, Instagram’s ad load has been noticeably lower than core Facebook’s. But this is

about to change as Facebook recently opened Instagram to all advertisers. Instagram has

also unveiled the 30 second video ad available to advertisers. Thus, Instagram’s revenue

growth will now begin in earnest, and we are optimistic.

Importantly, Instagram ads leverage Facebook’s anonymized user data, which nearly

ensures these ads will deliver a similar bang-for-your-buck as Facebook’s core mobile

News Feed ads. And if we assume Instagram ads deliver similar ROI to Facebook’s core

mobile ads, advertiser demand should be robust.

To size the revenue opportunity, we compare Instagram’s user base to the core Facebook

mobile user base in terms of 1) the number of users across each geography, 2) ARPU, and

3) the expected ad load.

Our base case 2016 Instagram revenue estimate is $531MM, which we grow to $1.44B in

2017.

By 2019, we model Instagram revenue of $3.2B (generated from a global user base of

1.23B MAUs). For comparison, FB generated more than twice that amount of from a

similarly sized mobile user base in 2014. (2014 FB actual: $7.43B mobile rev from ~1.2B

mobile users).

Sizing Instagram’s Revenue Opportunity Based on Comps with Facebook’s

Core Mobile Business

1) First, we project Instagram’s Monthly Active Users per geography

through 2019.

Since Facebook acquired Instagram in April 2012 (for ~$1B cash + stock), user

levels have grown tenfold to 400 million MAUs.

This is roughly 31% as large as Facebook’s core mobile business, which has ~1.3

million MAUs and generated ~$7.43B in revenue in 2014.

Note when Facebook acquired Instagram it had only 30MM+ users; or only 6%

as large as Facebook’s 543MM mobile users at the time.

Our base case 2016 Instagram

revenue estimate is $531MM, which

we grow to 1.44B in 2017.

FB

Target Change

October 21, 2015



Chart 14: Instagram Monthly Active Users (MAUs) Continue to Rise

Source: Facebook

Importantly, we assume Instagram has similar user engagement levels to core

Facebook.

On its 4Q’14 earnings call, the company noted Instagram and Facebook

account for 20% of people’s time on mobile in the US. Third party data confirms

Instagram has very high engagement levels.

Facebook says 30% of Instagram’s users located in the US. For core Facebook,

about 15-18% of users are outside the US (and Canada).

Facebook has recently confirmed Instagram has 400MM monthly active users.

Also, management has previously stated that ~30% of users are located in the

US, where ad prices are highest.

For the remaining 70% of users, we assume 95MM are located in Europe,

105MM are located in Asia, and the remaining 90MM are in Rest of World.

Table 3: Facebook and Instagram Users by Geography

Facebook Core Instagram*

US & Canada 213 110

Europe 311 95

Asia 496 105

Rest of World 471 90

Total 1,491 400

Source: Facebook, Jefferies Estimates (* denotes an estimate)

The geographic mix is important because Facebook earns far more revenue per

user in North America than anywhere else. To underscore this point, the US and

Canada account for nearly half of revenue despite the fact they account for 15-

18% of total Facebook users.

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FB

Target Change

October 21, 2015



Table 4: Facebook Monthly and Daily Active Users by Geographic Region

Monthly Active Users (MM) Q1’14 Q2’14 Q3’14 Q4’14 % Users / Geo

US & Canada 202 204 206 208 14.9%

Europe 289 292 296 301

85.1% Asia 390 410 426 449

Rest of World 395 411 423 436

Total MAU's 1276 1317 1351 1394 100.0%

Daily Active Users (MM)

US & Canada 150 152 155 157 17.6%

Europe 203 206 212 217

82.4% Asia 216 228 242 253

Rest of World 233 243 256 263

Total DAU's 802 829 865 890 100.0%

Source: Facebook

We ultimately model Instagram user growth through 2019. We assume Instagram crosses

the ~1B user mark at some point in 2018.

Note the geographic mix of our estimates is roughly consistent with FB’s current

geographic mix.

Also, note our 2019 base case MAU estimate of 1.23B is about ~15% lower than the

1Q’15 actual FB user base of 1.44B MAUs.

Table 5: Instagram Monthly Active User (MAU) Estimates by Geographic Region

Source: Facebook, Jefferies Estimates

2015 2016 Low 2016 High 2017 Low 2017 High 2018 Low 2018 High 2019 Low 2019 High

US & Canada 110 132 143 152 172 167 197 175 217

Europe 95 128 143 154 178 185 223 203 256

Asia 105 168 184 235 276 306 372 367 484

Rest of World 90 153 162 214 243 278 328 334 426

Total 400 581 631 755 868 936 1120 1080 1383

Average Total 400

Y/Y Growth Rate Ests.

US & Canada 20% 30% 15% 20% 10% 15% 5% 10%

Europe 35% 50% 20% 25% 20% 25% 10% 15%

Asia 60% 75% 40% 50% 30% 35% 20% 30%

Rest of World 70% 80% 40% 50% 30% 35% 20% 30%

606 812 1028 1231

FB

Target Change

October 21, 2015



Chart 15: Instagram Monthly Active User (MAU) Projections (MM)

Source: Jefferies Estimates

2) Next, we model go-forward Facebook ARPU projections based off

historic actual results for core Facebook.

Ad prices continue to ramp quickly as FB’s mobile news feed ads command ever

higher prices. This is driven in part by 1) a mix shift towards lower-funnel

eCommerce / direct response oriented ad formats like DPAs and Mobile App

Install Ads and 2) more advertisers spending more money across a roughly fixed

number of ad impressions.

Over time we assume ad prices continue to rise across all geographies.

Table 6: Facebook ARPU Estimates by Geographic Region


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2015 2016 2017 2018 2019

high

base

low

high

base

low

2016 Low 2016 High 2017 Low 2017 High 2018 Low 2018 High 2019 Low 2019 High

US & Canada $8.96 $9.35 $9.85 $10.75 $10.64 $11.82 $10.64 $12.41

Europe $3.95 $4.10 $5.53 $5.95 $6.63 $7.43 $7.30 $8.55

Asia $1.53 $1.59 $1.99 $2.15 $2.39 $2.68 $2.63 $3.08

Rest of World $1.04 $1.08 $1.24 $1.35 $1.43 $1.62 $1.57 $1.86

Y/Y Growth Rate Ests.

US & Canada 15% 20% 10% 15% 8% 10% 0% 5%

Europe 30% 35% 40% 45% 20% 25% 10% 15%

Asia 30% 35% 30% 35% 20% 25% 10% 15%

Rest of World 20% 25% 20% 25% 15% 20% 10% 15%

FB

Target Change

October 21, 2015



3) Third, we model go-forward Instagram ARPU projections by applying

a discount to core FB ARPU projections.

At first blush, it broadly makes sense that Instagram ad prices will be lower than

FB for several reasons. Over time we believe this gap will converge across all

geographies.

But in the US currently, we are seeing evidence that Instagram ad prices are

actually higher than for core FB, per Salesforce.com.

For the most part, Instagram ad pricing should be relatively similar to Facebook

over time, and our model assumes the gap narrows over time.

This rings true given both platforms leverage the same data, and both platforms

should have similar ad units (display, video). Additionally, Instagram will

leverage the same kinds of direct-response ads as core-FB, which have naturally

higher ad prices.

This will have a positive effect on ARPU over time.

See our Instagram ARPU assumptions below.

Table 7: Instagram ARPU Estimates by Geographic Region



US & Canada $8.96 $9.81 $9.85 $11.28 $10.64 $11.82 $10.64 $12.41

Europe $2.96 $3.49 $4.42 $5.05 $5.64 $7.06 $6.93 $8.55

Asia $0.61 $0.79 $1.19 $1.72 $1.91 $2.28 $2.36 $3.08

Rest of World $0.31 $0.22 $0.43 $0.54 $0.86 $1.21 $1.26 $1.58

Instagram ARPU Discount vs. Core FB

US & Canada 0% -5% 0% -5% 0% 0% 0% 0%

Europe 25% 15% 20% 15% 15% 5% 5% 0%

Asia 60% 50% 40% 20% 20% 15% 10% 0%

Rest of World 70% 80% 65% 60% 40% 25% 20% 15%

FB

Target Change

October 21, 2015



4) Finally, we model go-forward Instagram revenue projections based

on ad load as a percentage of core FB.

Our base case 2016 Instagram revenue estimate is $531MM, which we grow to

$1.44B in 2017.

By 2019, we model Instagram revenue of $3.2B (generated from a global user

base of 1.23B MAUs). For comparison, FB generated more than twice that

amount of from a similarly sized mobile user base in 2014. (2014 FB actual:

$7.43B mobile rev from ~1.2B mobile users).

Table 8: Instagram Revenue Estimates by Geographic Region


Chart 16: Instagram Annual Revenue Projections ($MM)

Source: Jefferies Estimates


US & Canada $296 $491 $822 $1,259 $1,066 $1,516 $1,399 $2,156

Europe $76 $149 $204 $360 $417 $865 $563 $985

Asia $10 $29 $56 $142 $146 $297 $260 $597

Rest of World $5 $7 $9 $26 $60 $139 $126 $270

Total $387 $676 $1,092 $1,787 $1,688 $2,817 $2,349 $4,007

Average Total

Ad Load as % of FB

US & Canada 25% 35% 55% 65% 60% 65% 75% 80%

Europe 20% 30% 30% 40% 40% 55% 40% 45%

Asia 10% 20% 20% 30% 25% 35% 30% 40%

Rest of World 10% 20% 10% 20% 25% 35% 30% 40%

$3,178$2,253$1,440$531

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low

FB

Target Change

October 21, 2015



Visualizing an Instagram Ad

Below is an example of an Instagram Ad utilizing the carousel image format. The user first

sees the image with ad copy informing the user on the product. The user can than scroll

to see additional images and is promted with a “Learn More” button. Users can also

“Like” and “Comment” on the ad providing interaction and engagement. Kinetic Social,

a social marketing firm, has stated that on Facebook carousel ads can increase traffic to

sites by as much as 10x more than static ads. The ads also get about 1% click-thru rate

while non-carousel ads get 0.1% and the best mobile banner ads get 0.5%

Exhibit 12: Tiffany & Co. CT60 Watch Collection Advertisement on Instagram (Four Pages, Carousel Format)

Source: Facebook

Tiffany & Co. Sponsored Post

Ad copy and hashtag:

Introducing the Tiffany CT60 watch collection. Inspired by New York, crafted in

Switzerland.#TiffanyNYMinute

4 page ad - swipe right for more info

51,688 likes1,147 comments

Clicking “Learn More” takes user to Tiffany web page with

product video

FB

Target Change

October 21, 2015



Exhibit 13: After User Clicks “Learn More” on Instagram Ad

Source: Facebook

Click to view a product video

Back to Instagram mobile feed

Click to “Learn More”

FB

Target Change

October 21, 2015



Instagram Auto-Play Video Ads

Instagram has also started to integrate auto-playing video ads in the user’s stream. Below

is an example of a Dewar’s ad featured in a user’s stream. The high quality video is

engaging and begins playing when the ad enters the stream similar to user generated

content. The user can then click on the video to enable sound (same as user generated

content). On certain video ads users can click “Watch More” which will redirect

the user to the brand’s web page.

Exhibit 14: Dewar’s Instagram Video Ad - Autoplay

Source: Instagram

FB

Target Change

October 21, 2015



App Install Ad on Instagram

Instagram has also allowed App Install Ads as seen below for Fan Duel. The user is

presented with the ad in stream including ad copy in the comment section. When the

user clicks on “Install Now” it redirects them to their devices app store

directly to the app’s download page.

Exhibit 15: Fan Duel App Install Ad on Instagram

Source: Instagram

FB

Target Change

October 21, 2015



Growth Driver #3: Facebook Audience Network Serving Ads in 3rd Party Mobile Apps

As the app economy grows, Facebook continues to roll out products designed to appeal

to app developers. The newest product is called the Audience Network, which is designed

to help apps generate revenue by running small Facebook ads. The network was

announced in April 2014, and opened up to all advertisers in October.

App developers are already working closely with Facebook. The company’s Mobile App

Install Ads, which help apps to acquire new users, have been a smash hit since they were

launched.

Facebook does not break out the revenue contribution from Mobile App Install Ads, but it

likely accounted for a large chunk of FB’s $7.4B mobile business (2014 actual).

With the Facebook Audience Network, developers can now work with Facebook for both

user acquisition / distribution (Mobile App Install Ads) and monetization (Facebook

Audience Network). We think this is a powerful one-two punch, with both products

complimenting each other nicely. We think developers will see plenty of utility from the

Audience Network.

Exhibit 16: Facebook Audience Network Ad from the Popular “2048” App

Source: Facebook, Jefferies

Facebook AudienceNetwork

“Banner Ad” Format

As Facebook limits the ad-load on its

own core app, the Audience

Network is an easy way to serve

more ads over time (without ruining

the user experience).

FB

Target Change

October 21, 2015



‘Instant Articles’ Bring High-Quality Content Direct to FB’s Mobile News Feed In May, Facebook introduced Instant Articles, a new tool for publishers to deliver articles

directly inside the user’s mobile news feed.

For the initial rollout, Facebook partnered with nine of the biggest websites in the world

like The New York Times, The Guardian, BBC News, National Geographic and Buzzfeed.

Already, publishers like Conde Nast, Hearst, Time Inc., CNN and Bustle have expressed

interest in participating as Facebook opens the service to more publishers over time.

Instant Articles furthers the company’s ambitions to be a one-stop-shop for the discovery

and consumption of content. Additionally, this content will bring premium, brand-safe ad

inventory directly into users’ mobile News Feeds.

Instant Articles uses FB’s photo and video technology to serve these same articles up to

10x faster than standard web articles, which are (by far) the slowest loading content type

on Facebook.

Facebook has introduced new features like tilt-to-pan photos, auto-play video, embedded

video captions, and interactive maps. By publishing direct to Facebook, publishers can

create slick looking, interactive mobile articles that still retain the brand’s look and feel.

Publishers will have full control over advertising.

There are two primary options for monetization.

First, the publisher can manage their own inventory on the Instant Articles platform. In

this scenario, the publisher keeps 100% of ad revenue and also receives readership data

from Facebook.

Most of Facebook’s early partners have selected this option.

Second, the publisher can elect for Facebook to handle the ad placements. In this

scenario, Facebook would take a ~30% revenue share. The ads can be customized to align

with the look and feel of the publisher’s other content, and will leverage FB’s massive data

set.

The influx of content will bring premium, brand-safe ad inventory directly

into users’ mobile News Feeds.

Over time Instant Articles should drive an influx of premium, brand safe-content directly

in the Facebook mobile News Feed. This in-turn gives Facebook the ability to sell high-

priced brand ads against each Instant Article.

Importantly, Instant Articles will be integrated directly into the Facebook Audience

Network.

FB

Target Change

October 21, 2015



Exhibit 17: National Geographic ‘Instant Article’ on Facebook’s iPhone App

Source: Facebook

FB

Target Change

October 21, 2015



Facebook 3Q Checks and Recent KPI Trends IgnitionOne noted Facebook continues to outpace the market in programmatic display

spend growth during 3Q, up 40% Y/Y. The firm also noted Facebook ad pricing continues

to climb in 3Q, with eCPMs up 33% Y/Y. Retail and Auto verticals both look strong, with

spending increasing +19% and 84% Y/Y, respectively.

AdRoll’s “Facebook by the Numbers 2015” report from September also paints a positive

picture, particularly around retargeting.

Globally, AdRoll says its retargeting clients increased their advertising spend on Facebook

by +31% Y/Y. When adding Facebook to an existing display retargeting campaign,

advertisers saw a 92% increase in reach, a 9% drop in CPM, and a 27% decrease in CPC.

By adding mobile retargeting to FB campaigns, advertisers saw a 60% increase in reach, a

64% increase in CTR, and a 36% drop in CPC.

This suggests advertiser uptake around Facebook’s Dynamic Product Ads (DPA) should be

robust as we head towards the holidays.

Chart 17: Facebook Engagement (DAU / MAU) At Highest Levels Ever

Source: Facebook

40.0%

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US & Canada Europe Asia Rest of World ALL USERS

FB

Target Change

October 21, 2015



Chart 18: Quarterly Revenue ($MM) per Geographic Region

Source: Facebook

Chart 19: Monthly Active Users (MM) per Geographic Region

Source: Facebook

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FB

Target Change

October 21, 2015



Raising Estimates We are raising estimates as we grow more optimistic around key go-forward revenue

drivers especially Instagram, video ads, and the Facebook Audience Network. Note the

outsized impact to EPS as we flow the incremental high-margin revenue through the

model (expenses remain roughly the same as before).

Table 9: Jefferies Estimate Changes

Source: Jefferies

2015 2016 2017 2018

Old $16,294 22,322 28,715 33,695

New $17,001 24,196 32,560 38,234

Old $1.72 2.32 2.71 3.24

New $1.97 2.78 3.41 3.96Non-GAAP EPS

Revenue

FB

Target Change

October 21, 2015



Facebook Model

Table 10: Facebook Income Statement ($MM)

Source: Company, Jefferies

Q1 14A Q2 14A Q3 14A Q4 14A Q1 15A Q2 15A Q3 15E Q4 15E F2014A F2015E F2016E

Total Revenue $2,502 $2,910 $3,203 $3,851 $3,543 $4,042 $4,314 $5,101 $12,466 $17,001 $24,196

% Y/Y Growth 72% 61% 59% 49% 42% 39% 35% 32% 58% 36% 42%

% Q/Q Growth (3%) 16% 10% 20% (8%) 14% 7% 18% -- -- --

Cost of Revenue 448 457 548 635 636 646 682 791 2,088 2,754 3,654

Total Gross Profit $2,054 $2,453 $2,655 $3,216 $2,907 $3,396 $3,633 $4,310 $10,378 $14,246 $20,542

% Margin 82.1% 84.3% 82.9% 83.5% 82.0% 84.0% 84.2% 84.5% 83.3% 83.8% 84.9%

Marketing and Sales 276 306 320 519 544 542 574 612 1,421 2,272 3,100

Research and Development 259 267 359 420 479 560 600 663 1,305 2,302 3,143

General and Administrative 145 168 215 235 223 246 250 281 763 1,000 1,338

Total Stock-Based Compensation 299 322 364 909 728 775 819 936 1,894 3,258 3,161

Adjusted Operating Income (excl. stock comp.)$1,415 $1,753 $1,820 $2,219 $1,840 $2,228 $2,209 $2,755 $7,207 $9,032 $12,961

% Margin 57% 60% 57% 58% 52% 55% 51% 54% 58% 53% 54%

% Y/Y Growth 137% 111% 78% 48% 30% 27% 21% 24% 90% 25% 44%

% Q/Q Growth (6%) 24% 4% 22% (17%) 21% (1%) 25% -- -- --

Adjusted EBITDA $1,638 $1,969 $2,050 $2,475 $2,118 $2,507 $2,654 $3,240 $8,132 $10,519 $16,275

% Margin 65.5% 67.7% 64% 64% 60% 62% 62% 64% 65% 62% 67%

% Y/Y Growth 104% 92% 63% 43% 29% 27% 29% 31% 69% 29% 55%

% Q/Q Growth (5%) 20% 4% 21% (14%) 18% 6% 22% -- -- --

Net Interest (Income) and Other (Income) 0 4 61 19 1 0 (26) (27) 84 (52) (96)

Adjusted Pre-Tax Profit / (Loss) $1,415 $1,749 $1,759 $2,200 $1,839 $2,228 $2,235 $2,781 $7,123 $9,083 $13,056

% Effective Tax Rate 35% 35% 35% 31% 35% 36% 39% 38% 34% 37% 35%

Provision / (Benefit) for Income Taxes 433 595 530 413 420 554 607 792 1,971 2,373 3,958

Tax Adjustments for Non-GAAP Items 56 14 80 269 230 237 270 270 419 1,007 653

Net Income Attributable to Participating Securities 3 3 4 5 3 0 0 0 15 3 0

Minority Interest 0 0 0 0 0 0 0 0 0 0 0

Operating Net Income / (Loss) $923 $1,129 $1,145 $1,513 $1,189 $1,437 $1,358 $1,720 $4,710 $5,703 $8,445

% Margin 37% 39% 36% 39% 34% 36% 31% 34% 38% 34% 35%

% Y/Y Growth 169 115 74 85 29 27 19 14 114% 21% 48%

% Q/Q Growth 13 22 1 32 (21) 21 (6) 27 -- -- --0

Stock-Based Compensation 299 322 364 909 728 775 819 936 1,894 3,258 3,161

Tax Effect of Non-GAAP Entries (56) (14) (80) (269) (230) (237) (270) (270) (419) (1,007) (653)

Reported GAAP Net Income / (Loss) $639 $788 $802 $696 $512 $719 $792 $1,032 $2,925 $3,055 $5,937

% Margin 26% 27% 25% 18% 14% 18% 18% 20% 23% 18% 25%

% Y/Y Growth 194% 138% 90% 34% (20%) (9%) (1%) 48% 117% 4% 94%

% Q/Q Growth 23% 23% 2% (13%) (26%) 40% 10% 30% -- -- --

Weighted Avg. Diluted Shares Outstanding 2,609 2,615 2,644 2,816 2,836 2,850 2,737 2,757 2,664 2,897 3,042

Operating EPS $0.36 $0.43 $0.43 $0.54 $0.42 $0.50 $0.50 $0.62 $1.77 $1.97 $2.78

% Y/Y Growth 165% 116% 66% 63% 15% 17% 15% 16% 103% 11% 41%

% Q/Q Growth 10 19 0 24 (22) 20 (2) 26 -- -- --

Reported GAAP EPS $0.24 $0.30 $0.30 $0.25 $0.18 $0.25 $0.29 $0.37 $1.10 $1.05 $1.95

% Y/Y Growth 159% 130% 82% 21% (26%) (16%) (5%) 52% 106% (4%) 85%

% Q/Q Growth 19 23 1 (19) (27) 40 15 30 -- -- --

F2014 F2015

FB

Target Change

October 21, 2015



Table 11: Facebook Revenue Build ($MM)


Table 12: Facebook Balance Sheet ($MM)



Total Revenue $2,502 $2,910 $3,203 $3,851 $3,543 $4,042 $4,314 $5,101 $12,466 $17,001 $24,196

% Y/Y Growth 72% 61% 59% 49% 42% 39% 35% 32% 58% 36% 42%

% Q/Q Growth -3% 16% 10% 20% -8% 14% 7% 18% -- -- --

Advertising Revenue $2,265 $2,676 $2,957 $3,594 $3,317 $3,827 $4,110 $4,888 $11,492 $16,142 $23,406

% Y/Y Growth 82% 67% 64% 53% 46% 43% 39% 36% 65% 40% 45%

% Q/Q Growth -3% 18% 11% 22% -8% 15% 7% 19% -- -- --

% of Total Revenue 91% 92% 92% 93% 94% 95% 95% 96% 92% 95% 97%

Mobile Advertising Revenue $1,336 $1,659 $1,952 $2,480 $2,421 $2,909 $3,247 $3,959 $7,427 $12,536 $20,597

% Y/Y Growth 258% 153% 122% 100% 81% 75% 66% 60% 136% 69% 64%

% Q/Q Growth 8% 24% 18% 27% -2% 20% 12% 22% -- -- --

% of Advertising Revenue 59% 62% 66% 69% 73% 76% 79% 81% 65% 78% 88%

Desktop Advertising Revenue $929 $1,017 $1,005 $1,114 $896 $918 $863 $929 $4,065 $3,606 $2,809

% Y/Y Growth 7% 8% 10% 1% -4% -10% -14% -17% 6% -11% -22%

% Q/Q Growth -16% 10% -1% 11% -20% 3% -6% 8% -- -- --

% of Advertising Revenue 41% 38% 34% 31% 27% 24% 21% 19% 35% 22% 12%

Payments and Other Revenue $237 $234 $246 $257 $226 $215 $204 $213 $974 $858 $790

% Y/Y Growth 11% 9% 13% 7% -5% -8% -17% -17% 10% -12% -8%

% Q/Q Growth -2% -1% 5% 4% -12% -5% -5% 4% -- -- --

% of Total Revenue 9% 8% 8% 7% 6% 5% 5% 4% 8% 5% 3%

F2014 F2015


Cash & Cash Equivalents $2,998 $4,384 $8,999 $4,315 $3,419 $5,123 $5,631 $6,848 4,315 6,848 $16,753

Marketable Securities 9,631 9,572 5,251 6,884 8,994 9,002 9,002 9,002 6,884 9,002 9,002

Accounts Receivable 1,006 1,190 1,363 1,678 1,508 1,815 1,937 2,291 1,678 2,291 3,258

Deferred Income Taxes 0 0 0 0 0 0 89 111 0 111 80

Prepaid Expenses and Other Current Assets 425 411 502 793 1,083 1,011 968 1,058 793 1,058 1,581

Current Assets $14,060 $15,557 $16,115 $13,670 $15,004 $16,951 $17,628 $19,310 $13,670 $19,310 $30,675

Property and Equipment 3,074 3,334 3,703 3,967 4,619 4,955 5,373 5,959 3,967 5,959 5,789

Long-Term Investments 0 0 0 0 0 0 0 0 0 0 0

Goodwill 0 0 0 0 0 0 0 0 0 0 0

Intangible Assets 1,682 1,672 3,929 21,910 21,779 21,630 21,630 21,630 21,910 21,630 21,630

Long-Term Deferred Income Taxes 0 0 0 0 0 0 0 0 0 0 0

Other Long-Term Assets 212 206 441 637 605 594 228 249 637 249 861

Total Assets $19,028 $20,769 $24,188 $40,184 $42,007 $44,130 $44,859 $47,147 $40,184 $47,147 $58,955

Accounts Payable $85 $146 $120 $176 $129 $139 $120 $139 176 139 $246

Platform Partners Payable 188 176 208 202 189 182 0 0 202 0 82

Accrued Expenses & Other Current Liabilities 525 666 709 866 1,300 1,472 1,196 1,307 866 1,307 1,830

Deferred Revenue & Deposits 38 53 48 66 55 49 86 102 66 102 137

Current Portion of Capital Lease Obligations 201 173 149 114 73 39 39 39 114 39 39

Current Portion of Long-Term Debt 0 0 0 0 0 0 0 0 0 0 0

Total Current Liabilities $1,037 $1,214 $1,234 $1,424 $1,746 $1,881 $1,441 $1,587 $1,424 $1,587 $2,333

Long-Term Debt 0 0 0 0 0 0 0 0 0 0 0

Capital Lease Obligations 191 153 129 119 113 110 110 110 119 110 104

Other Long-Term Liabilities 1,063 1,056 1,587 2,545 2,647 2,687 2,278 2,489 2,545 2,489 4,458

Total Liabilities $2,291 $2,423 $2,950 $4,088 $4,506 $4,678 $3,829 $4,186 $4,088 $4,186 $6,896

Convertible Preferred Stock 0 0 0 0 0 0 0 0 0 0 0

Common Stock 0 0 0 0 0 0 0 0 0 0 0

Retained Earnings (Accumulated Deficit) 3,801 4,592 5,398 6,099 6,611 7,330 8,122 9,154 6,099 9,154 15,091

Additional Paid-In Capital 12,921 13,759 15,949 30,225 31,337 32,479 33,265 34,164 30,225 34,164 37,326

Accumulated Other Comprehensive Loss 15 (5) (109) (228) (447) (357) (357) (357) (228) (357) (357)

Shareholders' Equity $16,737 $18,346 $21,238 $36,096 $37,501 $39,452 $41,030 $42,961 $36,096 $42,961 $52,060

Liabilities & Shareholders' Equity $19,028 $20,769 $24,188 $40,184 $42,007 $44,130 $44,859 $47,147 $40,184 $47,147 $58,955

F2014 F2015

FB

Target Change

October 21, 2015



Table 13: Facebook Cash Flow Statement ($MM)


Table 14: Facebook DCF ($MM)



Net Income $639 $788 $802 $701 $512 $719 $792 $1,032 $2,930 $3,055 $5,937

Depreciation 264 257 289 433 457 459 445 485 1,243 1,847 3,315

Amortization of Intangible Assets 0 0 0 0 0 0 0 0 0 0 0

Stock-Based Compensation 274 314 353 845 694 763 819 936 1,894 3,258 3,161

Tax Benefit from Stock Options 345 530 479 499 423 386 0 0 1,853 809 0

Excess Tax Benefit from Stock Options (348) (535) (482) (504) (417) (386) 0 0 (1,869) (803) 0

Deferred Taxes (1) (33) 4 (180) (223) (66) 0 0 (210) (289) 0

(Gain) / Loss on Sale of PP&E (13) 0 0 0 0 0 0 0 (13) 0 0

Other / Charges 9 (16) 1 2 0 1 0 0 (4) 1 0

Funds From Operations $1,169 $1,305 $1,446 $1,796 $1,446 $1,876 $2,056 $2,454 $5,824 $7,878 $12,413

(Inc.) Dec. in Accounts Receivable 105 (187) (182) (346) 84 (282) (122) (353) (610) (674) (968)

(Inc.) Dec. in Prepaid Expenses and Other Assets (4) 14 (55) (78) (43) (47) (47) (112) (123) (248) (492)

(Inc.) Dec. in Other Assets 16 2 (176) (58) (32) 7 366 (21) (216) 320 (612)

Inc. (Dec.) in Accounts Payable (10) 79 (57) 19 (15) 31 (19) 19 31 16 107

Inc. (Dec.) in Platform Partners Payables 7 (12) (17) (6) (13) (6) (182) 0 (28) (201) 82

Inc. (Dec.) in Accrued Expenses and Other Liabilities (27) 102 123 130 134 107 (276) 111 328 76 523

Inc. (Dec.) in Deferred Revenue & Deposits 0 15 (12) 7 (10) (7) 37 16 10 36 35

Inc. (Dec.) in Other Liabilities 26 23 178 119 149 201 (409) 211 346 152 1,969

Change in Net Working Capital $113 $36 ($198) ($213) $254 $4 ($652) ($129) ($262) ($523) $643

Cash Flow from Operations $1,282 $1,341 $1,248 $1,583 $1,700 $1,880 $1,404 $2,325 $5,562 $7,355 $13,057

Purchases of Property & Equipment (363) (469) (482) (517) (502) (549) (863) (1,071) (1,831) (2,985) (3,145)

Purchases of Marketable Securities (2,974) (1,508) (1,733) (2,889) (3,055) (2,505) 0 0 (9,104) (5,560) 0

Maturities and Sales of Marketable Securities 1,466 1,576 6,059 1,047 947 2,494 0 0 10,148 3,441 0

Acquisitions, Net of Cash Acquired 0 (19) (735) 199 (257) (25) 0 0 (555) (282) 0

Proceeds from Sales of PP&E 0 0 0 0 0 0 0 0 0 0 0

Change in Restricted Cash and Other (1) (2) (112) (4,456) 23 21 0 0 (4,571) 44 0

Net Cash Used in Investing Activities ($1,872) ($422) $2,997 ($6,616) ($2,844) ($564) ($863) ($1,071) ($5,913) ($5,342) ($3,145)

Debt Issuance / (Repayment) 0 0 0 0 0 0 0 0 0 0 0

Proceeds from / (Repurchase of) Stock 0 0 0 0 0 0 (33) (37) 0 (70) 0

Proceeds from Exercise of Stock Options 1 1 5 11 0 0 0 0 18 0 0

Proceeds from Sale and Lease-back Transactions 0 0 0 0 0 0 0 0 0 0 0

Principal Payments on Capital Lease Obligations (84) (66) (49) (44) (47) (44) 0 0 (243) (91) (6)

Excess Tax Benefit from Stock Options 345 535 482 434 418 386 0 0 1,796 804 0

Net Cash Provided by Financing Activities $262 $470 $438 $401 $371 $342 ($33) ($37) $1,571 $643 ($6)

Effect of Exchange Rate Changes 3 (3) (68) (52) (123) 46 0 0 (120) (77) 0

Inc. (Dec.) in Cash and Cash Equivalents ($325) $1,386 $4,615 ($4,684) ($896) $1,704 $508 $1,217 $1,100 $2,579 $9,905

Beginning Cash and Cash Equivalents 3,323 2,998 4,384 8,999 4,315 3,419 5,123 5,631 3,323 4,315 6,848

Ending Cash and Cash Equivalents $2,998 $4,384 $8,999 $4,315 $3,419 $5,123 $5,631 $6,848 $4,423 $6,894 $16,753

F2014 F2015

2015

2014A Q1 15A Q2 15A Q3 15E Q4 15E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Revenue $12,466 $3,543 $4,042 $4,314 $5,101 $24,196 $32,560 $38,234 $44,193 $51,119 $58,659 $67,340 $76,663 $87,300

% Y/Y Growth 58% 42% 39% 35% 32% 42% 35% 17% 16% 16% 15% 15% 14% 14%

EBITDA $8,132 $2,118 $2,507 $2,654 $3,240 $16,275 $21,696 $25,837 $30,390 $35,792 $41,862 $48,974 $56,844 $65,960

% Margin 65% 60% 62% 62% 64% 67% 67% 68% 69% 70% 71% 73% 74% 76%

% Y/Y Growth 69 29 27 29 31 55 33 19 18 18 17 17 16 16

Implied Taxes on Operations ($2,729) ($749) ($890) ($942) ($1,150) ($5,696) ($8,176) ($10,013) ($12,027) ($14,121) ($16,768) ($19,426) ($22,259) ($26,036)

% Effective Tax Rate 34% 35% 36% 36% 36% 35% 38% 39% 40% 39% 40% 40% 39% 39%

Capital Expenditures ($1,831) ($502) ($549) ($863) ($1,071) ($3,145) ($4,233) ($4,970) ($5,745) ($6,645) ($7,626) ($8,754) ($9,966) ($11,349)

% Y/Y Growth 34% 38% 17% 79% 107% 5% 35% 17% 16% 16% 15% 15% 14% 14%

Change in Net Working Capital ($262) $254 $4 ($652) ($129) $643 ($327) $130 ($277) ($145) ($331) ($363) ($501) ($603)

Tax Benefit from NOL Carryforwards 0 0 0 (17) (21) 0 0 0 0 0 0 0 0 0

Acquisitions Not Reflected on Balance Sheet / Shares-- -- -- 0 0 0 0 0 0 0 0 0 0 0

Unlevered Free Cash Flow $3,310 $1,121 $1,072 $180 $869 $8,077 $8,960 $10,984 $12,341 $14,880 $17,137 $20,431 $24,118 $27,972

NPV at 6/30/15 Valuation Date and 9.6% WACC -- -- $176 $830 $7,368 $7,462 $8,349 $8,563 $9,422 $9,906 $10,780 $11,616 $12,294

Perpetuity Growth Rate / Terminal Value at 9.6% WACC Implied Terminal Value / Terminal EBITDA Multiple

3.0% 3.5% 4.0% 4.5% 5.0% 9.4x 10.2x 11.2x 12.3x 13.8x

$618,121 $672,449 $736,564 $813,375 $907,064 $618,121 $672,449 $736,564 $813,375 $907,064

Median DCF Valuation at 6/30/15 Valuation Date WACC Equity Value per Share

NPV of Cash Flows and Terminal Value $382,276 8% $134 $142 $152 $165 $179

Plus: Net Cash 14,125 9% 124 131 141 152 165

Implied Equity Value $396,401 10% 114 121 130 140 152

Implied Fully Diluted Shares Outstanding (MM) 3,054 11% 106 112 120 129 140

Implied Equity Value per Share $130 12% 98 104 111 120 130

FB

Target Change

October 21, 2015



Comp Sheet

Chart 20: Jefferies Internet Comp Sheet - Valuations

Source: Jefferies, company data, FactSet

Price Price Upside to YTD Firm 15-18E 15-18E 2015E 15-18E 2015E

10/18/2015 Target Target Performance Value1

EBITDA EPS P/E to FCF FCF

Company Ticker Rating ($) ($) (%) (%) ($MMs) 2015E 2016E CAGR 2015E 2016E CAGR (%) Growth 2015E 2016E CAGR (%) Yield (%)

Interactive Entertainment

Activision ATVI Buy $34.17 33 -3 69.6 26,228 17 14 12 26 22 11 2.3 23 21 4 4.7

Electronic Arts EA Buy $71.71 80 12 52.5 19,551 13 12 11 23 21 17 1.4 22 13 21 7.5

Zynga ZNGA Buy $2.46 5 103 (7.5) 1,162 97 13 132 222 30 149 1.5 15 13 26 7.5

GameStop GME NC $44.46 -- -- 31.5 4,992 6 6 -- 11 10 -- -- 12 -- -- --

TakeTwo TTWO Buy $31.59 37 17 12.7 1,914 -- 7 (442) 29 17 26 1.1 12 10 (1) 9.9

weighted average 56 16 12 27.8 21 15.6 1.7 21.1 15.83 10 5.5

mean 32 33 10 62 20 50.8 1.6 17 14.50 13 7.4

Advertising & Internet Services

Google GOOG Buy $695.32 800 15 31.0 409,987 13 10 15 22 18 14 1.6 28 22 18 4.6

Facebook FB Buy $97.54 130 33 25.0 283,694 27 17 35 50 35 26 1.9 68 30 12 3.3

Yahoo! YHOO Buy $33.37 61 84 (33.9) 25,799 24 22 7 47 44 13 3.7 -- 46 (167) 2.2

Twitter TWTR Buy $31.15 56 79 (13.2) 18,252 34 19 65 90 45 67 1.3 -- 52 (303) 1.9

LinkedIn LNKD Buy $197.90 300 52 (13.8) 24,471 37 25 49 91 51 63 1.4 58 84 39 1.2

IAC / InterActiveCorp IACI Hold $71.37 80 12 17.4 6,602 14 9 21 22 13 25 0.9 43 14 50 7.4

Yelp YELP Buy $22.65 42 85 (58.6) 1,451 20 13 49 64 38 44 1.5 34 19 27 5.3

WebMD WBMD NC $43.65 -- -- 10.4 2,535 14 12 -- 31 29 -- -- 20 13 -- 7.8

Criteo CRTO Buy $42.49 66 55 5.1 2,475 18 13 28 34 29 51 0.7 223 35 60 2.9

Rocket Fuel FUEL NC $4.95 -- -- (69.3) 211 41 7 -- -- -- -- -- -- -- -- --

Demand Media DMD Hold $4.77 5 4 (22.1) 53 -- -- (165) -- -- (24) -- 5 -- (32) --

Millennial Media MM NC $1.75 -- -- 9.4 216 -- 161 -- -- 175 -- -- -- -- -- --

Zillow ZG NC $32.94 -- -- (0.2) 1,539 18 9 -- -- 53 -- -- -- 75 -- 1.3

GrubHub GRUB NC $31.32 -- -- (13.8) 2,381 21 16 -- 50 39 -- -- 24 -- -- --

Lending Club LC NC $14.36 -- -- (43.2) 4,807 93 42 -- 155 67 -- -- 193 74 -- 1.4

On Deck Capital ONDK Buy $9.00 27 200 (59.9) 516 59 19 135 343 19 205 1.7 9 5 52 20.0

comScore SCOR NC $44.55 -- -- (4.0) 1,628 17 14 -- 25 21 -- -- 23 18 -- 5.6

Blucora BCOR Hold $11.80 15 31 (14.8) 415 6 6 18 10 8 12 0.8 8 -- 0 --

TechTarget TTGT Buy $9.35 13 40 (17.8) 303 11 9 19 21 16 24 0.9 16 10 24 10.2

Quinstreet QNST NC $5.97 -- -- (1.6) 220 15 10 -- 33 18 -- -- -- 12 -- 8.0

United Online UNTD NC $11.23 -- -- (22.8) 91 3 4 -- 12 13 -- -- 18 8 -- 12.8

Tremor Video TRMR Buy $1.95 6 203 (32.1) 36 -- 7 (268) -- -- (205) -- -- -- (193) --

Rubicon Project RUBI NC $15.57 -- -- (3.5) 514 14 10 -- 34 31 -- -- 50 41 -- 2.5

TubeMogul TUBE NC $11.48 -- -- (49.1) 275 -- 80 -- -- 153 -- -- -- -- -- --

Marchex MCHX NC $4.16 -- -- (9.4) 89 6 7 -- 25 31 -- -- 16 31 -- 3.2

weighted average 23 20 14 38 27 21.2 1.7 43 28 3.1 3.9

mean (15) 24 23 61 43 24.2 1.5 49 33 (31.6) 5.6

Online Travel

Priceline PCLN Buy $1,336.57 1,600 20 17.2 65,484 17 14 23 23 18 21 1.1 26 19 25 5.2

Expedia EXPE Hold $127.38 127 0 49.2 18,606 15 11 21 28 18 26 1.1 15 15 6 6.8

TripAdvisor TRIP Hold $83.20 84 1 11.4 12,001 25 18 31 39 30 31 1.3 36 25 29 3.9

eDreams ODIGEO EDR-MCE Hold $2.53 3.96 56 33.3 697 7 6 10 18 17 34 0.5 4 3 12 30.7

HomeAway AWAY NC $29.02 -- -- (2.6) 2,191 18 15 -- 47 38 -- -- 31 27 -- 3.8

Travelzoo TZOO NC $9.52 -- -- (24.6) 85 10 9 -- 53 36 -- -- 22 22 -- 4.5


mean 14 15 12 35 26 28.1 1.0 22 19 17.9 9.1

eCommerce

Amazon.com AMZN Buy $570.76 730 28 83.9 266,451 23 17 30 223 89 52 4.3 43 24 48 4.1

eBay EBAY Hold $24.55 27 10 3.9 27,705 8 8 7 14 13 6 2.2 8 13 (7) 7.9

PayPal PYPL Buy $34.29 44 28 (6.6) 40,464 N/A N/A N/A 27 23 N/A N/A 25 21 N/A 4.7

Alibaba Group BABA Buy $71.99 89 24 (30.7) 176,845 24 20 20 28 22 25 1.1 16 20 15 5.0

JD.com JD Buy $26.89 43 60 16.2 32,014 72 30 87 -- 91 -- -- 39 58 29 1.7

Zalando ZAL-ETR Buy $32.90 32 (4) 14.1 6,888 47 32 35 93 60 38 2.4 215 105 58 0.9

Groupon GRPN Hold $3.82 5.25 37 (53.8) 1,414 5 5 7 28 24 18 1.5 9 11 (11) 8.7

Shutterstock SSTK Hold $31.65 39 23 (54.2) 926 11 8 27 27 22 23 1.2 18 21 15 4.9

Cimpress CMPR Hold $79.73 75 -6 6.5 3,190 12 10 13 24 15 24 1.0 26 18 19 5.5

Shutterfly SFLY Hold $38.78 51 31 (7.0) 1,496 8 6 17 339 62 139 2.4 0 10 126 9.7

RetailMeNot SALE Buy $9.32 10 7 (36.3) 311 5 6 2 17 25 (4) (4.6) 9 21 (18) 4.8

Coupons.com COUP NC $8.00 -- -- (54.9) 461 14 8 -- 36 17 -- -- -- -- -- --

Endurance EIGI Buy $14.85 26 78 (19.4) 3,000 13 11 18 12 10 17 0.7 9 7 18 13.8

Web.com Group WWWW NC $22.80 -- -- 20.1 1,645 11 10 -- 10 9 -- -- 10 9 -- 11.4

Wix.com WIX NC $21.30 -- -- 1.4 737 62 22 -- -- -- -- -- 112 27 -- 3.7

Chegg CHGG Buy $7.34 14 91 6.2 662 114 33 178 682 -- 273 2.5 41 19 60 5.2

BlueNile NILE NC $32.60 -- -- (9.5) 344 15 13 -- 36 31 -- -- 18 17 -- 6.0

CafePress PRSS Hold $4.33 5.00 15 84.3 33 9 8 14 -- -- (182) -- -- 148 (150) 0.7

Overstock OSTK NC $17.17 -- -- (29.3) 313 7 6 -- 28 19 -- -- -- -- -- --

PFS Web PFSW NC $15.05 -- -- 18.9 255 13 10 -- 753 43 -- -- 73 15 -- 6.8


mean (2) 25 14 140 34 35.8 1.3 40 31 15.6 5.9

Online Entertainment

Netflix NFLX Hold $98.99 105 6 102.8 42,131 88 69 63 287 169 98 2.9 -- 162 (225) 0.6

Rovi Corp ROVI NC $11.44 -- -- (49.4) 1,811 9 8 -- 8 6 -- -- 7 6 -- 17.9

Pandora P NC $19.91 -- -- 11.7 3,843 47 23 -- 105 45 -- -- 108 45 -- 2.2

TiVo Inc. TIVO Buy $9.32 18 88 (21.3) 238 2 2 10 18 11 23 0.8 56 7 (13) 14.2

Rentrak Corp RENT NC $54.79 -- -- (24.8) 808 38 22 -- 225 68 -- -- 142 48 -- 2.1

weighted average 86 80 62 258 150 84.0 2.5 11 143 (193.0) 1.5

mean (9) 32 21 108 50 52.9 1 63 49 (90.9) 7

Valuation metrics of non-covered companies are based on FactSet mean estimates

(2) EA 2012E = Fiscal year ending 03/2012; 2013E = Fiscal Year ending 03/2013

(3) TTWO 2012E = Fiscal year ending 10/2011; 2013E = Fiscal Year ending 10/2012

(4) TIVO 2012E = Fiscal year ending 01/2012; 2013E = Fiscal Year ending 01/2013

(1) Firm Value equal to Equity Value plus straight and convertible debt, straight and convertible preferred stock, and minority interest less cash and cash equivalents, marketable securities, and equity in unconsolidated affiliates.

Price / Earnings

Firm Value /

EBITDA

Price / FCF / share

FB

Target Change

October 21, 2015



Chart 21: Jefferies Internet Comp Sheet - Estimates

Source: Jefferies, company data, FactSet

Market Cap

10/18/2015

Company Ticker Rating ($MM) 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E 2015 2016 Gross Operating

Interactive Entertainment

Activision ATVI Buy $26,752 4,609 5,242 4,655 5,006 1,555 1,851 1,609 1,840 1.33 1.54 1.34 1.56 1,145 1,261 68.3 31.9

Electronic Arts EA Buy $21,797 4,538 4,833 4,541 4,784 1,468 1,580 1,394 1,551 3.08 3.39 2.95 3.38 1,011 1,630 74.0 27.7

Zynga ZNGA Buy 2,261 799 867 705 793 21 168 12 90 0.01 0.08 (0.03) 0.04 150 170 71.6 1.1

GameStop GME NC 4,717 -- -- 9,603 9,944 -- -- 831 888 -- -- 3.87 4.38 391 -- -- --

TakeTwo TTWO Buy 3,335 1,209 1,708 1,432 1,696 (9) 285 171 264 1.09 1.83 1.01 1.65 282 330 41.4 (3.2)

Advertising & Internet Services

Google GOOG Buy 481,951 62,163 73,380 60,074 69,857 32,167 40,210 29,835 34,731 31.50 37.89 28.86 33.76 17,120 22,173 79.6 43.4

Facebook FB Buy 297,819 17,001 24,196 17,207 23,365 10,519 16,275 10,838 14,510 1.97 2.78 2.07 2.74 4,370 9,911 83.8 53.1

Yahoo! YHOO Buy 31,465 4,157 4,100 4,188 4,142 1,069 1,155 991 985 0.71 0.76 0.67 0.69 (1,883) 678 73.9 10.8

Twitter TWTR Buy 21,573 2,273 3,342 2,240 3,237 541 938 540 892 0.35 0.69 0.33 0.62 (122) 416 71.4 14.0

LinkedIn LNKD Buy 26,375 2,937 3,895 2,953 3,853 664 991 671 989 2.19 3.89 2.23 3.56 453 313 87.6 13.3

IAC / InterActiveCorp IACI Hold 6,515 3,189 3,438 3,216 3,507 477 717 485 662 3.20 5.44 3.10 4.11 153 482 73.4 9.4

Yelp YELP Buy 1,806 547 694 546 695 73 114 76 115 0.35 0.59 (0.15) 0.05 53 97 90.7 5.3

WebMD WBMD NC 1,641 -- -- 630 682 -- -- 188 211 -- -- 1.39 1.52 81 128 -- --

Criteo CRTO Buy 2,777 521 624 541 709 139 187 140 198 1.26 1.48 1.21 1.73 12 80 35.9 18.2

Rocket Fuel FUEL NC 216 -- -- 504 587 -- -- 5 28 -- -- (0.95) (0.61) (34) (6) -- --

Demand Media DMD Hold 95 130 150 131 145 (7) (9) (7) (7) (1.27) (0.97) (1.31) (1.30) 20 (12) 46.0 (33.0)

Millennial Media MM NC 247 -- -- 272 274 -- -- (24) 1 -- -- (0.20) 0.01 (29) (7) -- --

Zillow ZG NC 5,365 -- -- 666 841 -- -- 86 177 -- -- (0.05) 0.62 (26) 75 -- --

GrubHub GRUB NC 2,607 -- -- 364 469 -- -- 111 147 -- -- 0.63 0.81 111 129 -- --

Lending Club LC NC 5,388 -- -- 405 630 -- -- 52 116 -- -- 0.09 0.22 28 73 -- --

On Deck Capital ONDK Buy 689 248 383 247 338 9 28 8 27 0.03 0.48 0.02 0.37 81 138 58.5 0.6

comScore SCOR NC 1,791 -- -- 377 439 -- -- 94 115 -- -- 1.78 2.15 75 98 -- --

Blucora BCOR Hold 493 479 808 470 533 72 106 72 78 1.24 1.54 1.28 1.34 60 (478) -- 18.9

TechTarget TTGT Buy 339 119 135 118 134 28 34 27 34 0.44 0.60 0.39 0.50 22 34 74.4 11.5

Quinstreet QNST NC 269 -- -- 296 322 -- -- 15 23 -- -- 0.18 0.34 -- 21 -- --

United Online UNTD NC 169 -- -- 206 214 -- -- 35 36 -- -- 0.93 0.88 9 21 -- --

Tremor Video TRMR Buy 100 200 246 197 230 (4) 5 (6) 3 (0.21) (0.02) (0.37) (0.20) (8) (2) 40.5 (5.5)

Rubicon Project RUBI NC 688 -- -- 248 331 -- -- 37 52 -- -- 0.46 0.51 14 17 -- --

TubeMogul TUBE NC 397 -- -- 166 207 -- -- (6) 3 -- -- (0.23) 0.08 (22) (5) -- --

Marchex MCHX NC 155 -- -- 143 146 -- -- 15 12 -- -- 0.17 0.14 10 5 -- --

Online Travel

Priceline PCLN Buy 69,667 9,280 11,112 9,238 10,878 3,745 4,784 3,652 4,408 58.56 74.08 57.06 69.00 2,667 3,651 93.1 37.7

Expedia EXPE Hold 17,865 6,686 8,403 6,580 8,031 1,214 1,729 1,154 1,492 4.52 7.21 4.30 5.96 1,179 1,214 80.9 11.2

TripAdvisor TRIP Hold 12,459 1,541 1,928 1,540 1,878 484 667 488 615 2.13 2.81 2.07 2.59 350 489 95.9 25.6

eDreams ODIGEO EDR-MCE Hold 266 517 564 511 543 105 118 105 114 0.14 0.15 0.17 0.27 70 82 -- --

HomeAway AWAY NC 2,785 -- -- 500 579 -- -- 122 149 -- -- 0.62 0.77 90 105 -- --

Travelzoo TZOO NC 140 -- -- 132 135 -- -- 8 9 -- -- 0.18 0.26 6 6 -- --

eCommerce

Amazon.com AMZN Buy 270,816 107,119 127,057 105,914 126,552 11,459 15,792 10,430 13,607 2.56 6.41 1.62 4.89 6,236 11,194 33.4 2.7

eBay EBAY Hold 30,761 8,625 9,000 8,609 9,036 3,428 3,623 3,432 3,636 1.77 1.84 1.79 1.92 3,691 2,438 80.8 32.7

PayPal PYPL Buy 42,965 9,241 10,770 9,236 10,729 -- -- 2,481 2,884 1.23 1.48 1.25 1.49 1,729 2,011 -- --

Alibaba Group BABA Buy 187,811 14,519 18,433 14,416 18,699 7,373 8,964 7,394 9,491 2.55 3.21 2.49 3.06 11,853 9,473 67.7 28.3

JD.com JD Buy 36,766 27,761 38,832 28,492 39,747 442 1,081 26 462 (0.01) 0.29 (0.21) 0.03 935 636 13.3 (1.5)

Zalando ZAL-ETR Buy 8,053 3,089 3,688 3,310 4,101 148 212 165 245 0.36 0.55 0.41 0.64 37 76 45.3 3.6

Groupon GRPN Hold 2,674 3,165 3,415 3,177 3,509 295 305 290 337 0.14 0.16 0.13 0.19 312 233 44.5 5.5

Shutterstock SSTK Hold 1,279 428 536 426 519 83 119 83 108 1.16 1.44 1.17 1.50 70 62 60.2 16.3

Cimpress CMPR Hold 2,719 1,650 1,815 1,588 1,767 266 333 245 269 3.37 5.21 3.72 3.53 104 149 61.7 8.2

Shutterfly SFLY Hold 1,435 1,060 1,206 1,057 1,192 194 235 192 229 0.11 0.63 (0.15) 0.45 13 139 51.6 10.2

RetailMeNot SALE Buy 513 236 236 237 242 60 51 61 63 0.54 0.37 0.60 0.59 56 24 91.9 18.2

Coupons.com COUP NC 677 -- -- 261 320 -- -- 34 59 -- -- 0.22 0.46 -- -- -- --

Endurance EIGI Buy 1,969 754 863 752 853 235 280 267 313 1.28 1.55 1.26 1.56 224 271 60.6 27.1

Web.com Group WWWW NC 1,187 -- -- 557 581 -- -- 152 166 -- -- 2.40 2.68 117 133 -- --

Wix.com WIX NC 844 -- -- 203 271 -- -- 12 34 -- -- (1.33) (1.01) 8 31 -- --

Chegg CHGG Buy 729 311 302 306 283 6 20 4 24 0.01 (0.07) (0.04) 0.20 18 38 36.9 (3.5)

BlueNile NILE NC 383 -- -- 496 526 -- -- 24 26 -- -- 0.90 1.06 21 23 -- --

CafePress PRSS Hold 76 106 114 111 117 4 4 4 6 (0.11) (0.10) (0.18) (0.00) (9) 1 39.6 (2.9)

Overstock OSTK NC 430 -- -- 1,723 1,939 -- -- 44 53 -- -- 0.61 0.91 -- -- -- --

PFS Web PFSW NC 276 -- -- 199 243 -- -- 19 24 -- -- 0.02 0.35 4 19 -- --

Online Entertainment

Netflix NFLX Hold 42,341 6,777 8,430 6,787 8,706 481 607 493 603 0.35 0.58 0.20 0.31 (641) 262 32.2 2.2

Rovi Corp ROVI NC 991 -- -- 517 574 -- -- 195 231 -- -- 1.50 2.07 148 178 -- --

Pandora P NC 4,269 -- -- 1,182 1,451 -- -- 82 169 -- -- 0.19 0.45 39 93 -- --

TiVo Inc. TIVO Buy 951 452 507 478 498 108 135 121 143 0.53 0.85 0.31 0.52 17 135 62.3 23.6

Rentrak Corp RENT NC 858 -- -- 129 173 -- -- 21 37 -- -- 0.24 0.81 6 18 -- --

(1) All figures represent "Operating EPS", defined to excludes SBC and 1x items as per Mgmt, except the following companies which are GAAP: AMZN, AOL, NFLX, TIVO, VCLK

(2) FCF for non-covered companies are FactSet means

(3) EA 2012E = Fiscal year ending 03/2012; 2013E = Fiscal Year ending 03/2013

(4) TTWO 2012E = Fiscal year ending 3/2012; 2013E = Fiscal Year ending 3/2013

(5) TIVO 2012E = Fiscal year ending 01/2012; 2013E = Fiscal Year ending 01/2013

EPS1 ($)

Jefferies Estimate Consensus

FCF2 ($MM) 2015E Margin (%) Revenue ($MM)


EBITDA ($MM)


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Company DescriptionFacebook, Inc. operates the world’s largest social network. The company builds tools that enable users to connect and communicate witheach other; enables developers to build social applications on Facebook or to integrate their Websites with Facebook; and offers products thatenable advertisers to engage with users. The company was founded in 2004 and is headquartered in Menlo Park, California.

Analyst Certification:I, Jefferies US Internet Team, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Brian Pitz, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subjectcompany(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or viewsexpressed in this research report.I, Brian Fitzgerald, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Timothy O'Shea, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Stan Velikov, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Corey Werbelow, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, John Streppa, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.

Company Specific DisclosuresFor Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.

Explanation of Jefferies RatingsBuy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below $10 is 20% or morewithin a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated securities with an averagesecurity price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. ForUnderperform rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is minus20% or less within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial projections or opinionson the investment merits of the company are provided.

Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,

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https://javatar.bluematrix.com/sellside/Disclosures.action

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P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.

Jefferies Franchise PicksJefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selectionis based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/rewardratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the numbercan vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason forinclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility inthe bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intendedto represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment stylesuch as growth or value.

Risks which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.

Other Companies Mentioned in This Report• Activision Blizzard, Inc. (ATVI: $33.78, BUY)• Alibaba Group Holding Limited (BABA: $69.48, BUY)• Amazon.com, Inc (AMZN: $555.77, BUY)• Blucora Inc. (BCOR: $11.14, HOLD)• CafePress, Inc. (PRSS: $4.62, HOLD)• Chegg Inc. (CHGG: $7.01, BUY)• Cimpress N.V. (CMPR: $75.33, HOLD)• Criteo S.A. (CRTO: $42.73, BUY)• Demand Media, Inc. (DMD: $4.44, HOLD)• eBay, Inc. (EBAY: $24.21, HOLD)• eDreams ODIGEO SA (EDR SM: €2.35, HOLD)• Electronic Arts Inc. (EA: $72.79, BUY)• Expedia, Inc (EXPE: $129.14, HOLD)• Facebook, Inc. (FB: $98.47, BUY)• Google, Inc. (GOOG: $642.61, BUY)• Groupon (GRPN: $3.64, HOLD)• IAC / InterActiveCorp (IACI: $67.35, HOLD)• JD.com, Inc. (JD: $26.01, BUY)• LinkedIn Corporation (LNKD: $193.00, BUY)• Netflix, Inc. (NFLX: $97.96, HOLD)• On Deck Capital Inc. (ONDK: $9.26, BUY)• PayPal Holdings Inc. (PYPL: $33.83, BUY)• RetailMeNot Inc. (SALE: $9.27, BUY)• Shutterfly, Inc (SFLY: $39.94, HOLD)• Shutterstock (SSTK: $28.74, HOLD)• Take-Two Interactive Software, Inc. (TTWO: $31.76, BUY)• TechTarget, Inc. (TTGT: $9.18, BUY)• The Priceline Group Inc. (PCLN: $1,364.29, BUY)• TiVo Inc. (TIVO: $9.02, BUY)• Tremor Video, Inc. (TRMR: $1.85, BUY)• TripAdvisor (TRIP: $82.17, HOLD)• Twitter, Inc. (TWTR: $29.30, BUY)• Yahoo!, Inc. (YHOO: $31.12, BUY)• Yelp, Inc. (YELP: $22.39, BUY)• Zalando SE (ZAL GR: €30.59, BUY)• Zynga, Inc. (ZNGA: $2.37, BUY)

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Distribution of RatingsIB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY 1126 53.47% 311 27.62%HOLD 832 39.51% 168 20.19%UNDERPERFORM 148 7.03% 18 12.16%

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